Brazil Aug Inflation Remains Benign, Eases To Three-Yr Low

Brazilian consumer prices continued to ease in August, decelerating to a three-year low as food prices retreat and the effects of the global economic slowdown resonate in Latin America’s largest economy.

The official IPCA consumer price index gained 0.15% in August compared with the 0.24% advance registered in July, the Brazilian Census Bureau, or IBGE, said Thursday. That was the lowest monthly IPCA rate since a 0.05% advance in August 2006.

“The August result completes the downward trajectory that started in 2008 after the crisis, which diminished global demand for commodities and left food prices lower in the domestic market,” said IBGE economist Eulina Nunes dos Santos. “That’s in stark contrast to what happened in 2007, when there was heavy upward pressure on commodities.”

More important, the rolling 12-month IPCA rate fell below the government’s year-end target of 4.5%. The widely watched 12-month rate slipped to 4.36% in August compared with 4.5% in July. That was the lowest mark for the key indicator since November 2007, when the rolling 12-month rate was 4.19%.

Easing inflationary pressures should give the Central Bank of Brazil room to leave interest rates at reduced levels for the foreseeable future. Earlier this month, central bankers maintained the Selic base interest rate at 8.75%, the lowest for the reference rate since its inception in 1999.

Economists and analysts expect inflation will remain benign throughout the rest of 2009 as consumer demand ebbs because of the global economic slowdown, perhaps even falling below the government’s 4.5% target.

In the Brazilian Central Bank’s most recent survey of analysts and economists, released Monday, market watchers pegged the year-end 2009 IPCA at 4.30%. In 2008, the inflation rate was 5.9%.

Food prices, which carry the heaviest weight in the IPCA, were the key driver to easing prices in August, the IBGE’s Santos said. Food prices retreated 0.01% compared with a 0.06% slide in July.

The Brazilian diet is rich in fresh fruits and vegetables, and prices for the key commodity products have declined in step with global demand.

Non-food prices have also advanced at a slower pace in recent months, with the occasional uptick because of adjustments to administrative costs such as electricity rates and school tuitions.

Non-food prices gained 0.2% in August versus a 0.33% advance in July, IBGE said.

But here, too, the impact of the economic slowdown, as well as the swine flu outbreak, was felt in local inflation rates, IBGE’s Santos said.

“One factor that helped hold down the inflation rate was a 10% decline in airfares because of a reluctance to travel and crisis-related promotions,” Santos said.