Brazil Inflation Mid-June 2008

Brazil's mid-month consumer prices jumped by the most in four years in June, and the central bank forecast the fastest year-end inflation since 2004, cementing expectations that policy makers will push interest rates higher.

Inflation as measured by the IPCA-15 index rose 0.9 percent through mid-June, up from 0.56 percent a month earlier, the government said. It was the biggest jump since July 2004 when prices rose 0.93 percent. The annual inflation rate for 12 months through mid-June accelerated for the third straight month to 5.89 percent, up from 5.25 percent in mid-May.



Brazilian policy makers in the central bank's quarterly report on inflation released today said they expect rising food prices and domestic demand to push up the annual inflation rate to 6 percent by year-end. Looking ahead, annual inflation will slow to 4.7 percent by the end of 2009, remain unchanged in the first quarter of 2010 before rising to 4.8 percent in the second quarter of the year, the bank said.

The bank's previous quarterly inflation report, released in March, also put year-end inflation above the mid-point of policy makers' target of 4.5 percent, plus or minus 2 percentage points. Policy makers in March had forecast year-end inflation of 4.6 percent for 2008 and 4.4 percent for 2009.

Brazil Retail Sales April 2008

Brazil's retail sales rose 8.7 percent in April from April 2007, according to the latest data from the national statistics agency. The April increase was down from a revised 11 percent increase in March, according to data from the national statistic office in Rio de Janeiro.

Brazil IPCA Consumer Inflation May 2008

Brazilian consumer prices rose more than expected in May, led by higher food costs, adding pressure on the central bank to raise its benchmark interest rate again. Consumer prices as measured by the benchmark IPCA index increased 0.79 percent month on month. This was the biggest monthly jump in prices since April 2005.

The increase pushed the annual inflation rate to 5.58 percent, the fastest since January 2006, from 5.04 percent in April. Accelerating inflation may prompt central bank President Henrique Meirelles to raise the benchmark rate for a third time next month.



The central bank targets inflation of 4.5 percent, plus or minus 2 percentage points. The central bank has raised interest rates twice in recent months, by half a percentage point each time, in April and in May, taking the rate to 12.25 percent from the earlier 11.25 percent.




The central bank finds there is evidence that inflation is "diverging" from their targets and expect consumer prices to rise more than previously forecast in 2008 and 2009 according to the minutes of the June 3-4 meeting.

"The recent behavior of the IPCA price index has been notably less favorable than in the previous quarters....Inflation is showing signs of diverging from the target trajectory."

Interestingly policy makers, in addition to the normal points about global food and energy prices, note the existence of capacity constraints on the Brazilian economy. They suggest that there is a mismatch between supply and demand and that capacity constraints may limit industrial output growth in the coming months. Evidently institutional and infrastural policies which can help increase the potential output growth rate should be an important agenda item for Lula's government at the present time.

Brazil Central Bank Raises Interest Rates to 12.25%

Brazilian central bank President Henrique Meirelles and the other seven members of the central bank board raised the benchmark lending rate a half percentage point to curb accelerating inflation fueled by higher food costs and record consumer demand. The central bank increased rates to 12.25 percent from 11.75 percent.

"Continuing the adjustment process of the benchmark interest rate, which was initiated at the April meeting, the Copom decided unanimously to raise the Selic rate to 12.25 percent a year without bias" the bank said in a statement.

Henrique Meirelles also indicated policy makers are very likely to raise the benchmark lending rate further to contain inflation. The bank removed language from its April 16 statement saying it had carried out a ``significant part'' of the tightening process and in that sense the `rocess is much more ``open-ended.'' and the tightening cycle may well be longer than the previous statement indicated. The central bank are effectively going to increase the rate as much as they feel is needed.

Meirelles told the Brazilian parliament at the end of May that the bank will act to prevent rising wholesale industrial and agricultural costs from spreading to consumers as household demand expands at a record pace. The IGP-M inflation index, which has a 60 percent weighting in wholesale prices, rose to a three-year high of 11.53 percent in May.

Consumer prices had their biggest increase in four months in April on the back of of higher food costs. Consumer prices, as measured by the government's benchmark IPCA index, climbed 0.55 percent In April - up from 0.48 percent in March. Brazil's inflation rate in the 12 months to April was 5.04 percent.



Most of the macro economic indicators are showing signs of strong demand. Lending by banks has climbed at least 20 percent in each of the past three years. Retail sales jumped 11.4 percent in March, capping the strongest quarter on record. Industrial production jumped 10.1 percent in April from a year earlier, the highest in six months.




This picture is only completed when you think about the large inflows of funds Brazil is receiving at the present time. Brazil received $37.2 billion of foreign direct investment in the 12 months through April, a record annual inflow, and foreign exchange reserves were up to $195 billion in March 2008.




The half-point rate increase pushes Brazil's real interest rate, which is the rate after adjusting for inflation, to 7 percent, the highest among the world's leading economies.

Meirelles is also receiving significant backing from Brazil's President Luiz Inacio Lula da Silva who, after being re-elected to a second term in 2006, vowed to accelerate growth to a 5 percent annual pace through 2010. Economic growth accelerated last year to 5.4 percent and Brazil's economy grew at a 6.2 percent rate in the fourth quarter, more than twice the average pace of the past decade.

The principal problem facing monetary policy is that as interest rates rise external funds are attracted by the yield differential which can be obtained and this only adds to internal inflationary pressure.

The only real tools left to the government are institutional reforms to increase capacity and fiscal surpluses to drain some of the excess internal demand. Allowing the currency to rise further can also help, but again there is a delicate balance to be struck here between soaking up imported inflation and creating structural distortions in the development of the economy such that industrial growth is curtailed by problems created for manufactured exports by a strong currency and the excessive growth of financial services and construction fuelled by the availability of cheap borrowing (made possible by the achievement of investment grade) and the consequent acceleration of internal demand.


There is a real Scylla and Charybdis to be steered here between being export driven and excessive dependence on domestic demand, and I don't think anyone has found the "best path" here yet, but we do need to realise - as my colleague Claus Vistesen keeps emphasising (and see here for the Japanese case) - that someone needs to soak up the world's growing surpluses somewhere, and Brazil certainly seems to be one of the stronger candidates in the short term.


Brazil's politicians do seem to be on a learning curve here, and Finance Minister Guido Mantega, who only last February was questioning the need for more rate increases, this month reversed course and decided to cut the fiscal deficit at a faster pace to help rein in inflation. Yielding to calls by Meirelles, Mantega announced last week the government would cut spending by an additional 13 billion reais this year, boosting the budget surplus before interest payments to 4.3 percent of gross domestic product from 3.8 percent.

Brazil Industrial Output April 2008

Brazil's industrial output in April expanded at the fastest pace since last October, leading to speculation that the central bank may raise interest rates more than expected when policy makers meet tomorrow. Industrial production jumped 10.1 percent in April, up from a revised 1.5 percent increase in March, the government said today. However the early calendar date of easter has undoubtedly been a factor here.




As the press release from the statistics office, apart from the fact there were two less working days in March 2008 than in March 2007, and also a transport strike affected the production of ethanol and petrol refining, so in some ways the upsurge in output in April is only the corrolary of the declone in March.

Na comparação março 2008/março 2007, o setor registrou um acréscimo de 1,3% marca bem abaixo das observadas em meses recentes. Essa redução acentuada no ritmo do índice mensal pode ser explicada pelos seguintes fatores: menos 2 dias úteis em março de 2008 em relação a março de 2007, forte queda na atividade de refino de petróleo e produção de álcool e, em menor medida, as dificuldades no fluxo de matérias-primas importadas para consumo industrial, em função do movimento grevista dos auditores da Receita Federal iniciado em 18 de março. O menor ritmo também se confirma no índice de difusão (percentual de produtos em crescimento), que após chegar aos 65,6% em fevereiro recua para 44,1% em março, seu menor nível desde abril de 2006 (40,0%).

Of the 27 industrial sectors tracked by the statistics office, 16 showed growth from the previous month, led by a 7.3 percent increase in oil and ethanol output. In March, oil and ethanol production had fallen 10 percent.

Production of pharmaceuticals rose 8.1 percent in April, automobile output increased 2.3 percent and production of foodstuffs expanded 2 percent.

In broader categories, output of capital goods such as machinery increased 1.6 percent, expanding for the fourth straight month. Production of consumer goods fell 1.9 percent and output of intermediate goods slipped 0.2 percent.

Industrial output rose 7.3 percent in the first four months of the year and 7 percent in the 12 months through April, up from growth of 6.6 percent in the 12 months through March.