(Bloomberg) -- Brazil’s annual inflation eased roughly in line with expectations in August, a drop that’s unlikely to relieve the pressure on central bankers to lift interest rates when they gather next week.
Official data released Tuesday showed prices rose 4.24% from a year earlier, just below the 4.27% median estimate of analysts surveyed by Bloomberg. On the month, they fell 0.02%.
The robust pace of growth in Latin America’s largest economy has investors betting that a hike to the benchmark Selic from its current level of 10.5% is set for next week. The increase is also seen as necessary by many in financial circles to respond to a slide in the value of the currency, higher public spending and worsening inflation forecasts. Eventual borrowing cost rises would turn Brazil into an outlier as both regional and global central banks ease policy.
What Bloomberg Economics Says
“Tame headline and underlying inflation in August suggest that the tight labor market and surprising activity growth isn’t driving price pressures in Brazil just yet. The central bank may downplay that message at its Sept 18 meeting, though, focusing instead on looming weather-related risks and unanchored inflation expectations.”
— Adriana Dupita, Brazil and Argentina economists
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A 0.51% fall in housing costs, which came on the back of a reduction in electricity bills, as well as a 0.44% decline in the price of food and beverages led to August’s monthly drop. Meanwhile, the cost of education rose 0.73%, the statistics agency said.
The reading “doesn’t do anything for the central bank,” said Laiz Carvalho, an economist at BNP Paribas in Sao Paulo. “The drop would have had to be significant enough to move year-end forecasts, and that’s not what happened.”
Services Inflation
Propelled by a hot jobs market and government aid, Brazilian households are spending big even as high borrowing costs weigh on their finances. Inflation projections remain well above the 3% target for this year and next.
Tuesday’s data marked the first time over a year that the Brazilian economy experienced monthly deflation. Still, economists cautioned that gauges of service prices, a key cause of consternation for central bankers, edged up.
Simmering price pressures led the central bank to hit the brakes on its easing cycle in June, drawing fire from President Luiz Inacio Lula da Silva, who says double-digit borrowing costs are dampening growth and hurting working Brazilians.
The condemnation from the leftist president has stirred fears about the eventual politicization of monetary policy. Last month, Lula tapped ally and current central bank Monetary Policy Director Gabriel Galipolo to replace current Governor Roberto Campos Neto when his term ends in December.
Galipolo has tried to soothe investor anxiety by taking a hawkish tone in public appearances. But markets are largely unconvinced the central bank-chief-in-waiting will keep inflation in check, especially while Lula is promising to improve living conditions.
Despites the concerns, Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics, says a large increase at the Sept. 18 rate decision is unlikely.
“It’s hard to make a compelling case for large rate increases given how restrictive policy settings already are,” he wrote in research note.
--With assistance from Giovanna Serafim and Beatriz Reis.
(Recasts lede and adds analysis and context throughout)
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