UPDATE 2-Brazil inflation cools less than expected in mid-February

Fri Feb 22, 2013 10:02am EST

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* Consumer price index rises 0.68 pct
    * Core inflation reading slows
    * Investors add to bets on interest rate hike


    By Silvio Cascione
    SAO PAULO, Feb 22 (Reuters) - Brazil's inflation slowed less
than expected through mid-February despite a
government-sponsored cut in electricity rates, leading investors
to step up bets that the central bank could raise interest rates
later this year.
    The IPCA-15 consumer price index rose 0.68
percent, above analysts' forecasts for a median increase of 0.61
percent, government statistics agency IBGE said on Friday. The
index rose 0.88 percent in the prior month.  
    Trailing 12-month inflation accelerated to 6.18 percent, up
from 6.02 percent one month before. The government targets
annual inflation at 4.5 percent with a tolerance margin of 2
percentage points in either direction.
    Quickening inflation has become a headache for Brazilian
policymakers even after two years of frustrating economic
growth. Although part of the rise was due to the impact of bad
weather on food prices, a tight labor market has also kept
prices of services and non-tradable goods under heavy pressure.
    Yields on interest rate futures rose in São Paulo
on expectations that the central bank will raise rates later
this year to head off inflation. The yield on the interest-rate
contracts maturing January 2014, the most traded in the
session, rose to 7.77 percent, up from 7.67 percent on Thursday.
    Felipe Carvalho, an economist with Claritas Investimentos,
in Sao Paulo said an interest rate hike could not be ruled out
in the second half of the year.
    "Policymakers will try to stand pat on increases as much as
they can until the economic improves," Carvalho said.
    Core inflation, or a gauge of underlying trends in prices,
slowed from mid-January, according to estimates by private
economists. The so-called diffusion index, or the number of
sectors which presented price rises in the period, stayed at an
above-average level in mid-February, showing widespread price
pressures that may require government action later this year,
some economists say.
    The average of core inflation measures declined to 0.48
percent, from 0.67 percent in January's full-month rate,
according to a report by Citigroup GB&M.
    
    ELECTRICITY PRICES TUMBLE
    Electricity prices fell 13.45 percent in the month, cutting
0.45 percentage points off February's IPCA-15 index, IBGE said.
    The government cut electricity bills by 18 percent for
residential consumers and by up to 32 percent for industrial,
agricultural and commercial users. Apart from helping control
inflation, the move was designed to support manufacturers and
give the economy a boost. 
    Services prices rose 1.37 percent, up from 1.06 percent in
the month to mid-January, following a seasonal rise in tuition
fees, according to estimates by Banco Fator. In the 12 months to
mid-February, prices for services rose 8.51 percent.
    Prices of tradable goods rose 0.86 percent, reflecting the
impact of a sharp drop late last year in Brazil's currency, the
real. The monthly jump led the trailing 12-month gauge
for the segment to 6.21 percent from 5.05 percent. A more stable
exchange rate should help ease prices of tradable goods later
this year, according to the central bank.
    The central bank cut the Selic rate 10 straight times
through October 2012 to a record low of 7.25 percent, pledging
to keep it low for a "prolonged" period to bolster growth.
However, central bank president Alexandre Tombini said the bank
could "adjust" its policy as inflation drifts away from the
mid-point of the official target.  
    The Brazilian economy probably grew about 1 percent last
year, lagging far behind Latin American peers, despite the
interest-rate cuts and billions of dollars in tax cuts and
credit incentives by President Dilma Rousseff. 
    
    Below is the result for each price category:    
    
                              January  February
                                               
 - Food and beverages            1.45      1.74
 - Housing                       0.74     -2.17
 - Household articles            0.45      0.82
 - Apparel                       0.12      0.01
 - Transport                     0.68      0.46
 - Health and personal care      0.61      0.78
 - Personal expenses             1.80      1.15
 - Education                     0.33      5.49
 - Communication                -0.06      0.08
                                               
 - IPCA-15                       0.88      0.68
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