Mar 11, 2014
Inflation is set for a comeback in Brazil with food prices likely to be hit by one of the worst droughts in four decades, and with higher tuition fees providing an extra jolt.
A survey by The Wall Street Journal of 10 economists showed February monthly inflation will likely increase to 0.64% from 0.55% in January. The 12-month rate is expected to rise to 5.63% for the 12 months ended February, up from 5.59% at the end of January, according to the survey.
Inflation data will be published at 8 am ET on Wednesday.
High inflation readings have led the central bank to raise its key interest rate at eight consecutive monetary policy meetings, most recently to 10.75%. The central bank has slowed the pace of hikes with it’s last move a 0.25-percentage point increase instead of the previous half-point increases. Yet the most recent signals are that this cycle is set to continue.
“Inflation is not showing signs of consistent slowdown, so the central bank is likely to continue to increase” the benchmark rate, said Newton Rosa, an economist at SulAmerica Investimento, based in São Paulo, who is expecting at least one more 0.25-percentage point increase in the rate.
Tuition fees typically rise in Brazil in February as the new school year gets underway.
But the biggest shock will come from food costs because the ongoing drought is pushing up the price of fruits and vegetables. It’s a shock that could continue into the year, as retailers have still not passed all prices increases along from their wholesalers.
Moreover, economists worry the drought could start to drive up electricity prices as power companies are forced to fire up more expensive thermoelectric power plants to compensate for the dwindling reservoirs behind hydroelectric power plants.
The government has set aside some 9 billion Brazilian reais to cover these extra costs in 2014, but economists believe the final price could be much higher. With the government already trying to tighten its belt, it may decide to pass at least some of those costs on to customers.
“The room for the government to pay is very limited and soon we will see an increase in energy prices for costumers,” said Mr. Rosa.
The growing inflationary pressures in Brazil are coming during a challenging period for the central bank because the country has suffered through three year of slow economic growth, and the outlook isn’t much better. Economists expect Latin America’s biggest economy to expand at a mediocre rate of 2% this year.
Economists have been raising their forecasts for inflation for this year, but given Brazil’s tepid economic activity, they believe the central bank will try to limit rate increases as much as possible.
The most recent weekly survey by the central bank, of 100 economists and analysts, showed they expect the inflation rate to be 6.01% at the end of 2014, from 5.97% at the start of the year. The forecast for the benchmark interest rate at the end of the year increased to 11%, from 10.50% in the survey at the start of the year.