(Bloomberg) -- Inflation smashed through the top of the central bank’s tolerance range in Brazil and accelerated much more than expected in Chile as surging energy costs give policymakers another reason to worry.
Official data released Friday showed Brazil’s consumer prices rose 4.76% in October from the year prior, above the 4.5% tolerance ceiling of the central bank’s goal. Chile’s cost of living posted the biggest monthly rise since March of last year as annual inflation sped up to 4.7%.
Energy costs were a key driver of inflation for both countries, jumping 3.7% in Chile and driving up housing costs in Brazil by 1.49%.
Interest rate futures rose in both nations as investors bet policymakers will turn more hawkish after the inflation data. Some Chile watchers said the price report undercuts odds of another cut in interest rates next month. In Brazil, traders cemented bets that the central bank will speed up the pace of monetary tightening for the third straight meeting in December.
What Bloomberg Economics Says
“Faster underlying inflation in October may raise eyebrows at Brazil’s central bank and could fuel market bets on a 75-basis-point rate hike in December. The print raises the chances the BCB misses the inflation target in 2024 — the last year for which compliance is assessed on a calendar-year basis — as Governor Roberto Campos Neto wraps up his tenure.”
— Adriana Dupita, Brazil and Argentina economist
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In Brazil, efforts to tame inflation have been complicated by a historic drought that’s also wrecking crops. Earlier this year, regulators increased electricity prices to compensate for low water levels at hydroelectric power plants.
In October, food and beverage costs also increased 1.06% while personal expenditures rose 0.7%, according to the national statistics agency. In steak-obsessed Brazil, meat prices climbed nearly 6%, a jump analysts attributed to drought-induced production drop.
Brazil’s central bank doubled the pace of monetary tightening by delivering a half-point increase to its benchmark interest rate on Wednesday. In a statement, policymakers wrote that risks to their inflation scenarios are tilted to the upside, citing factors including resilient economic activity and rising consumer price forecasts.
Policymakers are also concerned about growing public spending and a widening fiscal gap under President Luiz Inacio Lula da Silva. Those worries have weighed on the real, which has tumbled more than 15% against the dollar so far this year.
More Caution
In Chile, the October inflation reading was “surprising and high,” Jorge Selaive, chief economist at Scotiabank Chile, wrote on X, adding that the data “complicates an interest rate cut in December.”
The government had said electricity tariffs would jump about 23% in October as part of a series of staggered increases approved by lawmakers earlier this year. Energy bills, which had been frozen since a period of social unrest starting in late 2019, previously increased by 12% in July.
Complicating matters further, food and non-alcoholic beverages surged by 2.2% last month, according to the national statistics institute.
Central bankers warned this week that they can not rule out more persistent inflation as energy bills get pricier and global economic uncertainty intensifies.
What Bloomberg Economics Says
“Along with weaker September activity and increased volatility after the US election, the figures complicate the monetary policy outlook. We expect more caution from policymakers, who will want to see inflation back on a downtrend before cutting interest rates further.”
— Felipe Hernandez, Latin America economist
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Chile’s central bank lowered borrowing costs to 5.25% last month, extending total rate reductions since mid-2023 to 6 percentage points. Yet economic activity fell in August and September, prompting the government to back off its 2024 growth estimate as the nation’s recovery runs out of steam.
--With assistance from Giovanna Serafim.
(Re-casts story to add Chile data, adds economist comments starting in fifth paragraph)
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