(Bloomberg) -- Brazil’s annual inflation sped up roughly in line with estimates in September as a historic drought pressured electricity and food prices in Latin America’s largest economy.
Official data released Wednesday showed prices rose 4.42% from a year earlier, just below the 4.44% median estimate of economists surveyed Bloomberg. On the month, they increased 0.44%.
Policymakers are raising interest rates as price pressures build and investors grow uneasy about the stewardship of Brazil’s economy. Growth has surged past expectations this year on a hot labor market and higher public spending under President Luiz Inacio Lula da Silva, while the worst drought on record is now causing power bills to spike.
What Bloomberg Economics Says
“A drought-driven spike in electricity and food prices drove up Brazilian headline inflation in September. Elsewhere, price gains remained tame. The data back our view that there’s no rush to tighten policy. We still think a 25-basis-point rate hike in November is more consistent with economic conditions than market pricing of more than 50 bps.”
— Adriana Dupita, Brazil and Argentina economist
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Those factors have helped push the annual inflation rate well above the central bank’s 3% target despite the drag of double-digit borrowing costs.
Power regulator Aneel began applying additional charges to electricity bills at the start of September in response to sinking reservoir levels at hydroelectric plants. About two-thirds of Brazil’s power supply comes from hydro, and prices are set to climb even higher in October due to lack of rainfall.
Higher electricity bills caused housing costs to jump 1.8% in September while food and beverages climbed 0.5% as the drought hit crops of staple products like oranges and coffee. Meanwhile, the price of personal goods fell 0.31%, the statistics agency said.
Central Bank
Inflation is picking up as markets monitor the change of governance at the central bank. On Tuesday the Senate confirmed Lula’s pick of Gabriel Galipolo to succeed current Governor Roberto Campos Neto, whose term ends in December.
The central bank’s board of directors, known as Copom, began a tightening cycle in September with a quarter-point hike to cool down the economy and haul inflation forecasts down to target. While policymakers assured the start of the cycle is gradual, they gave little indication of their next moves.
Most analysts bet more hikes are in store from the current level of 10.75%. That puts Brazil at odds with the region’s second-biggest economy, Mexico, which is poised to cut rates for a third consecutive time next month after its annual inflation slowed in September.
The latest Brazil inflation report “will only add to the hawkish mood at the central bank as Copom seeks to shore up its credibility amid concerns about the politicization of monetary policy,” Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics, wrote in a research note.
Galipolo is an ally of the leftist president and the bank’s current monetary policy director, and some investors are skeptical that he will be willing to sacrifice economic growth to curb price increases.
--With assistance from Giovanna Serafim.
(Recasts story and adds analysis, inflation details and context throughout.)
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