Brazil’s Inflation Soars Above Projections After Rate Cut

Bloomberg — Brazil’s annual inflation sped up more than expected in early August, snapping a 14-month slowdown as the central bank pledges to continue cutting its interest rate.

Government data released Friday showed consumer prices rose 4.24% in mid-August from a year earlier, more than the 4.12% median estimate from analysts surveyed by Bloomberg. Monthly inflation stood at 0.28%.

Brazil kicked off a monetary easing cycle on Aug. 2, lowering the benchmark Selic to 13.25% following a slowdown in consumer price growth and signs that activity is weakening. The annual inflation rate is now picking up due to comparisons from year ago when tax cuts were implemented. Still, months of double-digit borrowing costs have caused consumer demand and manufacturing to stagnate, infuriating President Luiz Inacio Lula da Silva as he tries deliver robust growth for Latin America’s largest economy.

Swap rates climbed across the curve after the release of the inflation data. Contracts due in January 2025, which indicate market sentiment about monetary policy at the end of next year, rose 12 basis points in morning trading, as traders reduced bets of a longer easing cycle.

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Inflation Drivers

During the first two weeks of August, housing costs jumped 1.08% on rising prices of utilities, representing the biggest driver of the mid-month increase. Another key contributor, health care costs, gained 0.81%, while the price of food and beverages fell 0.65%.

Estimates of core inflation, which strips out volatile items like food and fuel, accelerated to 0.33% on the month, from 0.09% before, according to Banco Pine S.A.

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That’s like to add to already mounting price pressures. On Aug. 15, state-controlled Petroleo Brasileiro SA jacked up wholesale gasoline and diesel prices to reduce a cost gap with international markets.

After months of selling fuels domestically at a steep discount, Petrobras, as the oil giant is known, pleased shareholders and surprised analysts with the size of the adjustment.

The annual inflation rate is far below last year’s peak over 12% though above the 2023 target of 3.25%. Central bank chief Roberto Campos Neto has pushed back against bets that policymakers will speed up monetary easing.

“The fight against inflation is not yet won,” he said last week. “A window has opened to lower rates with credibility.”

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--With assistance from Giovanna Serafim.

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