Brazil’s Lower Unemployment May Heighten Inflation Fears

Brazil’s unemployment rate fell in April after three months of increases, with a tight labor market and an upcoming round of wage negotiations potentially adding further inflationary pressures in South America’s largest economy.

The month’s 6.4% jobless rate was the lowest for April since 2002, when the current statistical series began, the Brazilian Census Bureau, or IBGE, said Thursday. Labor minister Carlos Lupi was cited by local Estado newswire as saying Brazil may enjoy its lowest-ever unemployment rate this year.

Unemployment in April fell 0.1 percentage point from 6.5% in March, with virtual stability in all areas surveyed, IBGE said. Numbers of unemployed people remained stable at 1.5 million, with numbers of employed also stable at 22.3 million. Numbers of workers with formal job contracts rose marginally to 10.8 million from 10.7 million in March and was 6.8% higher than a year earlier, indicating that more people are now paying taxes.

The unemployment rate in April 2010 was 7.3%.

“We expect a lower unemployment rate in 2011 than last year, as rates in January-April this year were on average 6.4%, compared with 7.4% last year,” said IBGE coordinator Cimar Azevedo.

“We could expect a bigger fall in unemployment as employment levels increase more,” the coordinator told reporters in Rio de Janeiro. “But this hasn’t happened yet: there aren’t enough job openings available to meet job seekers’ demands.”

Economists said that the currently tight labor market, with a shortage of skilled workers, should intensify inflationary pressures. “The Brazilian economy is working at full employment, and should continue that way in the medium term,” said Tatiana Pinheiro, of Santander Economia. “We believe the effects of the monetary tightening could be more significant in 4Q11.”

Jankiel Santos of Banco Espirito Santo said that “Given the clear dearth of workers, one can expect wage negotiations in the coming months may add to current inflationary pressures.”

Annual contracts for more than a million workers in banking, steel, autos and energy expire on Aug. 31.

While average salaries slipped 1.8% from March to BRL1,540 Brazilian reais ($956.52) in April, losing to inflation, purchasing power is expected to be regained in the second half after annual wage negotiations in several segments, Pinheiro said.

April salaries were 1.8% above April 2010 levels and the highest value ever for a month of April, IBGE said.

Brazil’s relatively low unemployment rate indicates that the Brazilian Central Bank still faces an uphill fight against inflation. Relatively tight labor markets force companies to raise salaries to attract workers, combining with rising consumer prices to create a volatile mix of inflationary pressures.

The IBGE said May 6 that the official IPCA consumer price index gained 0.77% in April, a slightly slower rate than the 0.79% rise in March. More important however, was the 6.51% rise in the 12 months through April, compared to a 6.30% advance in the 12 months through March, which exceeded the government’s year-end consumer inflation target of 4.5% and its upper tolerance band for inflation of 6.5%.

The central bank raised the benchmark Selic base interest rate in late April–the third rise since December–to head off inflationary pressures. The Selic was boosted by a quarter-percentage point to 12%, the highest rate in any major economy.