Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Friday, June 13, 2008

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.


Anonymous said...

Hmmm.. In today's global economy, I don't think any particular country can have control over its inflation rate (presuming its currency is not being artificially pegged).

What good will 12% rates in Brazil do when the rest of the world is flooding the system with money, China is growing like mad, and the US is carrying a 2% rate?

Brazil can raise rates to 20% and it won't lower the price of oil, food, etc. It might throw the country into recession, however. Will that make it worthwhile?

Unless their objective is to strengthen the currency in order to lower import costs (which may be viable, but at what cost to exports?), I can't see what the point is.

Edward Hugh said...


"In today's global economy, I don't think any particular country can have control over its inflation rate (presuming its currency is not being artificially pegged)."

Well I appreciate the problem you are driving at, but I think you put things too strongly. Not all countries have the same inflation rate, so obviously there are things you can do that may matter. The question is really to what extent monetary policy alone works.

(incidentally pegging doesn't necessarily help - look at China and Russia with the dollar, or the Baltics and Bulgaria with the euro - but equally unpegging may not resolve the issue either - take Turkey and India if you like. As with most thinks my feeling on this one as with so many other issues is "it depends", and we shouldn't get into shibboleths).

"What good will 12% rates in Brazil do when the rest of the world is flooding the system with money,"

Not as much as the central bank would like that is clear, but it may well do more than "nothing".

Obviously interest rates can only form part of a much more general package which should include running a fiscal surplus and large scale sterilisation (via bank reserves) to attack the fund inflow issues).

"Brazil can raise rates to 20% and it won't lower the price of oil, food, etc."

Well again, oil and energy rises are a given, but the important thing is to choke out "second round effects", ie to keep inflation around 5% and not let it shoot up into double digits.

Raising rates does of course tend to push up the real (since the money comes in looking for yield), and in this sense they do ease dollar quoted commidity price inflation a little, but I wouldn't make a huge song and dance about that.

One pf the perverse issues which does arise is that conventional monetary policy can make borowing in reais more expensive, but encourage people to borrow in other currencies (especially if the real is rising) such as dollars, yen, or swiss francs. I doubt this is a big issue in Brazil YET. But getting investment grade will obviously make forex borrowing more attractive and more possible in the mid term, and this is going to be an issue that conventional monetary policy will need to address.

I have been following the situation in this regard in Eastern Europe for some time now, and I recently put up this post which might interest you on the situation in Poland.

Basically - as you can see in the charts - as the Polish central bank has raised rates since last autumn there has been a steady increase in the proportion of non-zloty mortgage lending. Does this mean that it is useless the Polish central banks raising rates? I don't think so. But I do think they need to take this aspect into account and take a very strong line in terms of internal bank guidlines about the conditions for this type of lending (which I doubt they will do due to the importance and clout of the construction industry, but still, this is what they should do).

Basically we are of course headed for a thoroughly globalised world in terms of finance, but we aren't there yet, and there are still things you can do locally (ie nationally) in which case I would argue you should do them.

"and the US is carrying a 2% rate?"

Incidentally I do think too much importance has been attached in this regard to what Bernanke and co have been doing at the fed. Japan has interest rates at 0.5% - and these have only recently come up from zero - and there is bags of liquidity in Japan for those who want to leverage carry, so I think Japan rather than the US is the global sheet-anchor here.