Brazil’s Inflation Rate Update

SAO PAULO (Reuters) – Brazil’s annual inflation rate slowed less than expected in early January, according to official data released on Friday. This situation reinforces the likelihood of the central bank increasing interest rates by 100 basis points at its upcoming meeting.

Consumer prices, measured by the IPCA-15 index, rose by 4.5% in the year leading up to mid-January, as reported by the IBGE. This marks a decrease from 4.71% in the prior month, yet it exceeds the 4.36% anticipated by economists surveyed by Reuters.

The Brazilian central bank faces a difficult scenario characterized by strong economic activity, a tight labor market, and unanchored inflation expectations, despite forecasts of a more aggressive rate strategy for the year.

In December, policymakers raised the benchmark interest rate by one percentage point to 12.25% and indicated similar moves for their next two meetings, aiming to meet the central bank’s 3% inflation target.

According to Jason Tuvey, deputy chief emerging markets economist at Capital Economics, “January’s IPCA-15 data won’t lead the central bank to alter its previous guidance.” He noted that inflation remains significantly above the central bank’s target, the economy shows resilience, and fiscal concerns persist.

IBGE reported a 0.11% increase in prices for the month leading to mid-January, a slowdown from the previous month’s 0.34% rise, yet above the 0.03% decrease expected by economists. This monthly increase is mainly attributed to rising food and transportation costs, although decreased housing costs from a significant drop in electricity prices helped ease some of the pressures.

High food prices have been a significant concern for the Brazilian government. President Luiz Inacio Lula da Silva indicated that prioritizing the reduction of food prices is essential.

Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, commented, “Inflation has significantly rebounded recently, with key indicators suggesting a bleak near-term outlook.” He also noted that this situation implies the central bank will likely continue its aggressive rate hikes by 100 basis points in the upcoming meetings.