Brazil Monthly Inflation Falls Back (Slightly) In June

Brazil's monthly inflation rate slowed slightly in June from May, though prices still registered their second-biggest rise of 2008. On an annual basis inflation rose at the fastest pace since November 2005, underscoring central bank concern about price pressures.

The benchmark IPCA consumer price index was up 0.74 percent in June, down slightly from the 0.79 percent increase registered in May, according to the statistics agency IBGE. Annual inflation in June rose to a 31-month high of 6.06 percent.



Slowing inflation may give the the central bank - which the Economist wryly refers to as the new Bundesbank - room to pause on the current pace of rate increases which have seen policy makers push up the so-called Selic rate from a record low 11.25 percent to 12.25 percent this year.



Food and beverage prices jumped 2.11 percent in June after a 1.95 percent increase the May and there was a generalised gain in most items surveyed. Prices of staple foods, such as rice and black beans, surged last month, rising 9.9 percent and 7.54 percent, respectively. Clothing prices rose 0.42 percent in June, slowing from a 0.98percent monthly rate in May, while personal spending costs climbed 0.54 percent after a 1.11 percent rise in May, helping the slowdown in the month-on-month IPCA data.


Brazil's annual inflation rate has been running above the 4.5 percent midpoint of the central bank's annual target range throughout 2008.

Despite the strong commitment from the central bank to fighting inflation, my feeling is that the bank will now be more cautious about raising rates too fast. Interest rate hikes need time to have an impact - The central bank estimates that the impact of interest rates starts to be felt on real GDP with a lag of about one quarter - and there are now accumulating signs that Brazil's economy is slowing.

Retail sales growth eased up in April, rising by 8.7 percent from April 2007, was down from the 11 percent increase registered in March.



Also Brazil's industrial output expanded less than most economists expected in May, and this again may well reduce the appetite at the central bank to press ahead rapidly with interest-rate increases. Industrial production rose a mere 2.4 percent on a year on year basis, down considerably on the revised 10 percent increase in April.



The trade surplus was also down in May, and again I think there will be nervousness about any move which can push the real further upward and make exporting for nascent industries more difficult. In addition the finance ministry is now busy tightening fiscal policy, raising its target for the primary surplus (ie, before debt payments) from 3.8% of GDP to 4.3%. The increase represents 14.2 billion reais ($8.83 billion) in savings, and these could be used to further plans to build a sovereign wealth fund, according to Brazil's Planning and Budget Minister Paulo Bernardo Again this fiscal claw-back will tend to slow the economy yet further, and this may well be a more effective way of doing so - ie weakening demand-pull pressure for inflation pass-through - than raising interest rates excessively and in the process further raising the real making exports more difficult, especially since the yield differential only attracts additional funds which simply add to demand side pressures and make the upward move in interest rates counterproductive.

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.



Despite the fact that Brazil's Planning and Budget Minister Paulo Bernardo is constantly stressing that the government will take ``all necessary measures'' to curb inflation I would be cautious about any overly rapid judgement that central bank President Henrique Meirelles and his team are about to raise rates for a third time in 2008 when the Monetary Policy Committe meets on July 22-23 next.

Interestingly Morgan Stanley's Marcello Carvalho in a recent piece for the GEF comes down on the side of upside (and not downside) risks on the rate hike front. While he accepts growth is slowing, he still feels:

Risks for rates seem biased to the upside. In all, recent inflation data, trends in expectations and policy signs consolidate the notion that the Copom could have to hike for longer than it originally envisaged. Our forecast continues to assume a full hiking cycle of 300bp, to 14.25%, by end-2008. But risks around our call remain biased to the upside. Depending on how inflation expectations evolve, our econometric work suggests that the hiking cycle could prove to be in the range of 400-500bp (see “Brazil: Taylor-Made Monetary Policy”, This Week in Latin America, June 2, 2008).

Basically Cavalho is skeptical that the potential non-inflationary growth rate is as high as many imagine, and I suspect this is the difference between my view and his.

To keep things in perspective, 3% real GDP growth in 2009 should be interpreted as a sign of success for Brazil, given a darkening global outlook and Brazil’s own lackluster average growth performance in recent decades − not to mention outright recessions during previous downturns....Estimates for potential growth in Brazil may well be revised down, as a consequence. Most estimates would appear to put Brazil’s real GDP growth potential currently in the 4-4.5% range. We would not be surprised to see a downgrade in such estimates to the 3-4% range by the end of next year.
Marcello Carvalho

I think capacity growth in Brazil is now higher than many imagine, and I also think that the slowdown in growth in the developed economies (and possibly China at some point) will take a lot of the sharp sting out of upward pressure on global commodity prices a lot sooner than pergaps many imagine. Remember energy and food prices remaining comparatively HIGH is not the same thing as inflation (which is the rate of increase) remaining high. Absent second round effects inflation in those economies which are not pushing capacity limits (and Brazil would be the locus classicus here) can susbside as rapidly as it surged up. Indeed only yesterday Societe Generale SA's Albert Edwards - the analyst who predicted the Asian currency crisis a decade ago - was out there warning central bankers that deflation may soon overtake surging prices as the biggest risk to the world economy.

Brazil Trade Surplus, June 2008, Industrial Output and Retail Sales

Brazil's trade surplus narrowed to $2.7 billion in June from May as a rising currency and expanding domestic demand boosted imports. Imports rose to a record $15.9 billion from $15.2 billion in May, according to the trade ministry today. Exports fell to $18.6 billion from $19.3 billion. The May surplus was $4.1 billion.

Brazil's 12-month trade surplus narrowed to $30.8 billion in June, the smallest in four years, from $31.9 billion in May. The 12-month indicator has been shrinking since May 2007, when it peaked at $47.8 billion.

The Brazilian real has risen 20 percent against the dollar in the last 12 months, the best performance among the 16 most- traded currencies.

Brazil's industrial output expanded less than economists expected in May, possibly reducing the pressure on the central bank to accelerate interest-rate increases. Industrial production rose 2.4 percent in May on a year on year basis, down considerably on the revised 10 percent increase in April, according to the latest national statistics agency report.



One indicator that economic growth may now be slowing is that car production fell 5.5 percent in May from April. Another 15 of the 27 industrial activities tracked by the government also experienced monthly declines.


Further indication of the slowdown comes to us from Brazil's retail sales, which rose at the slowest pace in seven months in April, as rising consumer prices and tighter credit deterred household spending. The country's retail sales rose 8.7 percent in April year on year, down from a revised 11 percent gain in March.



Brazils central bank increased rates in June,to 12.25 percent from 11.75 percent, and it is clear more increases are in the pipeline. This batch of data may simply mean that rates neither rise so far, nor rise so fast as was previously being anticipated.

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.