Brazil Losing War Against Inflation. Consumer Price Index Up over 7%

Buying fish Brazil’s government data show that annual inflation in the country hit a six-year high in September. The benchmark IPCA consumer price index rose 7.31% in the 12 months through September – above the official target range ceiling of 6.5% for the sixth straight month and the highest 12-month rate since May 2005.

Even though policymakers reckon annual inflation likely peaked last month, economists nevertheless fret that a global slowdown will not ease price pressures in Latin America’s biggest economy quickly enough.

Since inflation at the end of last year was high, analysts said the 12-month rate will fall but the extent of the coming slowdown in price rises remains uncertain.

The central bank unexpectedly cut its benchmark Selic interest rate 50 basis points to 12% in August, citing the potential effects of the euro zone sovereign debt crisis and a fragile US economy.

But with Brazilian workers striking for higher salaries amid near record-low unemployment and a weakening currency making imports more expensive, economists worry that the rate cut was too risky.

They are not the only ones worried – inflation has been a topic of conversation across Brazil, from the posh neighborhoods to the favelas, or slums, as costs for everything from the lavish children’s parties common among upper-income levels to staple foods have shot up.

That poses a dilemma for President Dilma Rousseff. Brazilian voters have long memories of runaway consumer prices in years past and will almost certainly punish any politician that lets even a whiff of those years return. Brisk inflation especially hurts lower-income voters, the power base of Rousseff’s Workers’ Party.

Complicating the fight against inflation, Rousseff has also made clear that she wants Brazil’s sky-high interest rates to come down in line with global peers such as China and India.

Brazilian rates are the highest of major world economies, drawing foreign investors who pour in money to chase high returns and just as quickly withdraw those funds.

Central bank chief Alexandre Tombini says annual inflation probably peaked in September, with the rate expected to slow through year-end and into 2012.

In a quarterly inflation report at the end of September, the central bank said “moderate adjustments” to rates are consistent with taking inflation back toward the 4.5% centre of its target range in 2012. The bank’s monetary policy committee’s next interest rate decision is scheduled for Oct. 19.

The IPCA index rose 0.53% in September from August, quicker than the 0.37% pace in the previous month.

The bank expects the IPCA to rise 6.4% this year, barely inside its target range of 4.5% plus or minus 2 percentage points. Economists, however, see the rate at 6.52″ by year-end, which would mark the first year above the target ceiling since 2003.

Mercopress

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