Rousseff scrambles to fix Brazil's inflation problem

BRASILIA Wed Jan 23, 2013 11:52am EST

BRASILIA (Reuters) - Faced with an ever-bleaker economic outlook, Brazilian President Dilma Rousseff will announce on Wednesday a deeper-than-expected cut in electricity costs to help subdue a recent spurt in inflation and give a leg up to manufacturers, a government source told Reuters.

Rousseff will detail the cuts in a nationwide televised address as her left-leaning government struggles to regain investor confidence. Despite flat economic activity, data released on Wednesday showed inflation is running above 6 percent on an annual basis, well above Latin American peers such as Chile and Mexico.

The IPCA consumer price index rose 0.88 percent in the month to mid-January, the statistics agency said. That surpassed all estimates in a Reuters poll, and put inflation at 6.02 percent in the last 12 months.

Since Rousseff took office in early 2011, Latin America's biggest economy has struggled with uncompetitive industries, rising consumer debt and falling investment. Activity likely expanded just 1 percent last year, a striking decline for a country that grew 7.5 percent in 2010 and was considered a star performer among emerging markets for most of the past decade.

Rousseff and her economic team are racing to ensure 2013 is not another lost year for the economy.

Brazilian officials see the cut in electricity prices as one of their best tools available to help revive factories from their malaise and ease pressure on prices, a major concern in a country with a long history of runaway inflation.

The government plans to cut household power rates by 18.5 percent on average and rates for industrial consumers by 32-34 percent, said the source, who declined to be quoted because the plans have not yet been disclosed.

Brazil's central bank expects the electricity cuts could shave a full percentage point off of the IPCA index by the end of 2013, Reuters reported on Tuesday.

Inflation typically spikes early in the year in Brazil due to seasonal factors such as annual tuition increases, though this year a surge in food costs that has dragged on for months is putting additional pressure on prices.

The government expects those pressures to ease by late March, after which annual inflation should start to ease and close the year well within the official target range, a senior member of Rousseff's economic team told Reuters on Wednesday.

"Inflation is not going to be the story of the year," the source said on condition of anonymity.

Brazil's $2.5 trillion economy still enjoys record-low unemployment and healthy government finances. Polls show that most Brazilians are happy with Rousseff and the economy, thanks in part to the residual glow from the previous decade's boom.

Yet some economists say an extended slump could lead companies to start laying Brazilians off, which would endanger Rousseff's expected reelection bid in 2014.

Even some traditional areas of strength, such as agricultural commodities, have shown worrying signs.

Brazil's current account deficit widened in December to the biggest on record, and will barely shrink in January, the central bank said on Wednesday, citing weak demand for raw material exports that has eroded its traditional trade surplus.

The current account deficit jumped to $8.413 billion in December, the biggest monthly shortfall since at least 1980. That exceeded all estimates in a Reuters poll forecasting a $6.5 billion deficit.

Accelerating imports and more corporate profits sent overseas will also contribute to an estimated $8.3 billion current account gap in January, Tulio Maciel, the bank's head of economic research told reporters.

An increasingly unequal balance of payments also raises the question of whether Brazil can continue to cover the shortfall with foreign direct investment, whose growth has stagnated since a jump in late 2010.

(Additional reporting by Tiago Pariz, Alonso Soto, Luciana Otoni and Todd Benson; Writing by Brian Winter; Editing by David Gregorio)

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