Brazil’s Wholesale Prices Add To Inflation Concerns

Prices at Brazil’s factories continued to climb in March, although at
a softer pace than seen in February as heated domestic demand continued
to stretch production capacity in the country’s industrial sector.

Brazil’s official IPP producer price index advanced 0.39% in March,
compared with a 0.60% gain in February, the Brazilian Census Bureau, or
IBGE, said Wednesday. The index, launched in April, measures monthly
variations in product prices at the factory gate, not including taxes or
freight charges. The IPP rolling 12-month rate was 6.80% through March
compared with a 6.21% advance through February, the IBGE said.

Higher wholesale prices will add to concerns about inflation in Latin
America’s largest economy. Data out Tuesday showed factories already
operating at record production levels, making it difficult for industry
to boost output in order to ease price pressures. The producer-price
gains tracked an upswing in output at Brazil’s mines and factories in
March, the third-consecutive month of advancing industrial production.
The strong start to 2011, which came after a downturn in late 2010,
showed that the country’s industrial sector is operating at its highest
level of production since 1991.

The uptick in inflation at the wholesale level also followed a similar
advance in consumer prices, which have surged on heated domestic
demand. Greater access to credit, low unemployment and higher wages have
sent Brazilians on a spending spree that has generated price pressures
throughout the economy and elicited interest-rate increases by the
Brazilian Central Bank.

The IPCA consumer price index was running at 6.44% through mid-April,
well above the government’s year-end target of 4.5% and dangerously
close to the upper tolerance band of 6.5%. The central bank has
responded with three interest-rate increases so far in 2011, including a
quarter-percentage point boost in April that pushed the Selic benchmark
rate to 12%.

Finance Minister Guido Mantega said Tuesday that inflation will soon
decline, backing down from the government-set ceiling of 6.5%. “We don’t
see the rate overstepping the limit,” Mantega said during a televised
appearance before the Senate Economic Affairs Committee.

Economists and market analysts, however, believe that the central bank
may already be behind the curve in its fight against inflation.
Inflation expectations have become unhinged in recent months, according
to the bank’s weekly market survey. Economists raised their forecast for
the 2011 year-end IPCA to 6.37% from 6.34% in the previous week. The
2012 projection was held steady at 5%.

In March, 11 of the 23 categories measured showed higher prices, the
IBGE said. Prices for printing materials led the gains, climbing 5.35%,
followed by oil refining and alcohol products with a 1.99% advance.
Shoes and leather products climbed 1.86%, the IBGE said.

Turmoil in the key oil producing regions of North Africa and the
Middle East have caused a spike in international oil prices that was
felt in Brazil in March, the IBGE said. The jump in alcohol products,
meanwhile, is largely related to a surge in ethanol prices, a biofuel
made from sugar cane that is mixed 25% with gasoline at pumps in Brazil
as well as widely used as an alternative fuel in the country’s flex-fuel
car fleet. Prices for the fuel typically rise on tight supplies in the
first quarter each year as the country enters the inter-harvest period.