Brazil Inflation Gets ‘Temporary Relief’ as Increases in Food, Energy Slow

Smaller increases in Brazil’s food and energy prices helped ease inflation more than economists expected in May, even as prices of services continued to rise.

Consumer prices as measured by the IPCA-15 index rose 0.7 percent in the month through mid-May, the national statistics agency said today on its website. Economists expected a rate of 0.74 percent after a 0.77 percent increase in the mid-April reading, according to the median of 37 forecasts in a Bloomberg survey. Estimates ranged from 0.35 percent to 0.85 percent.

“It’s a temporary relief, inflation is getting stronger and more disseminated,” Newton Rosa, chief economist at Sul America Investimentos, said in a telephone interview from Rio de Janeiro. “Some seasonal factors, such as food prices, might help reduce readings until July. That doesn’t mean a change in the trend.”

Brazil has “work ahead” to bring inflation back to target next year amid demand pressures and high commodity prices, central bank President Alexandre Tombini said yesterday. Tombini, in a conference call with reporters, reiterated that policy makers will adjust monetary policy for a period sufficiently long to bring price increases down to the 4.5 percent mid-point of its target range.

Monthly inflation will be slower in the May to August period than it was between October and April, central bank economic policy director Carlos Hamilton said yesterday.
Upper Limit

Prices through mid-May rose 6.51 percent from a year ago, matching the reading of the benchmark IPCA index in April, which breached the upper limit of the government’s target range for the first time since 2005. Yields on interest rate futures contracts maturing in January 2013, the most-traded in Sao Paulo today, were unchanged at 10:30 a.m. New York time. The real rose 0.1 percent to 1.6147 per U.S. dollar.

Food prices rose 0.54 percent through mid-May after jumping 0.79 percent through mid-April, as prices for tomatoes and fruit fell 9.18 percent and 2.9 percent respectively. Transportation costs rose 0.93 percent after a 1.45 percent rise in the previous month. Ethanol prices rose 0.01 percent, down from 16.4 percent in the previous month.

Housing expenses rose 0.93 percent after increasing 0.72 percent the previous month. Rises in personal expenses and healthcare also quickened. Gasoline prices rose 5.3 percent, up from a 4.28 percent increase in April, the agency said. Gasoline sold to consumers contains 25 percent ethanol.
‘Soft Patch’

“A seasonal soft patch in monthly inflation readings is widely expected for the next few months, as usually happens at this time of the year,” Marcelo Salomon, head of Latin America research at Banco BNP Paribas Brasil, wrote in a note to clients today. “Yet longer-term underlying trends do not look encouraging.”

President Dilma Rousseff’s administration is relying on a mix of higher interest rates, spending cuts and measures to curb credit growth to fight the fastest inflation in more than five years.

Tombini said yesterday the economy is on a “consistent path” to meet its inflation target in 2012 as economic expansion slows. The central bank president said he expects monthly consumer price increases to fall to a level in line with the year-end target in the months ahead.

The central bank increased the benchmark interest rate by a quarter-point to 12 percent in April, after raising it half a percentage point in each of its previous two meetings.

“Sadly, services price inflation worsened from a month earlier and continues to run high, reflecting strong domestic demand conditions and very tight labor markets,” Salomon wrote.