Skip to main content

The Globe and Mail

Brazil inflation picks up, may overshadow stimulus

Persistent price pressure could be a headache for Brazilian President Dilma Rousseff as she races to shore up an economy that lagged most regional peers in 2011.

Ueslei Marcelino/Reuters/Ueslei Marcelino/Reuters

Brazilian inflation rose more than expected in the month through mid-January, likely complicating President Dilma Rousseff's efforts to revive a lacklustre economy and bring down some of the world's highest interest rates.

The benchmark IPCA consumer price index rose 0.65 per cent in the month to mid-January, above the 0.57-per-cent median forecast of economists polled by Reuters. The index rose 0.56 per cent in the month to mid-December.

While inflation over the 12-month period to mid-January eased to 6.44 per cent, its lowest level in nine months, the persistent price pressure could be a headache for Ms. Rousseff as she races to shore up an economy that lagged most regional peers in 2011.

Story continues below advertisement

Ms. Rousseff, a technocrat-turned-politician, has had marathon meetings with her cabinet ministers this week to draw up an action plan for this year aiming for economic expansion of at least 4 per cent. Her team is preparing more aggressive stimulus measures and tax breaks in her quest for faster growth, even if it means sacrificing some fiscal goals.

The Brazilian economy flat-lined in the third quarter of last year and recent signs of a recovery are under threat from a lingering European debt crisis that has dragged down global growth. Brazil's economy, Latin America's largest, likely grew around 3 per cent in 2011.

Economists warn that further stimulus could stoke the price pressures that drove inflation to a seven-year high last year.

Finance Minister Guido Mantega played down the higher-than-expected inflation data on Tuesday, saying it was owing to seasonal factors.

"The inflation rate is falling over all," he said, referring to the change in consumer prices over the past 12 months.

The global downturn has also hit Brazil's public accounts by reducing its trade surplus and prompting foreign companies to repatriate more of their profits.

On Tuesday, the country also posted a current account deficit of $6.1-billion in December, above most expectations.

Story continues below advertisement

Higher-than-expected inflation in mid-January is again raising fears of nagging price pressures after the government touched the official target ceiling of 6.5 per cent last year.

The central bank targets annual inflation of 4.5 per cent, with a "tolerance band" of 2 percentage points in either direction.

"We believe that Brazil's demand-boosting economic model is creating greater inflation risks than appreciated by markets and policy makers," Morgan Stanley economist Arthur Carvalho said in a research note before the data was released.

Higher inflation could limit the space the central bank has to further slash its benchmark interest rate, which at 10.5 per cent is the highest among major world economies.

The bank cut the key rate by half a percentage point for the fourth consecutive time last week in a bid to shield its fragile economic recovery from the global slowdown. Most economists expect two more similarly sized cuts in 2012.

Ms. Rousseff has said one of her government's main priorities was to lower interest rates to levels similar to those of emerging-market economies.

Story continues below advertisement

Report an error
Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.