UPDATE 4-Brazil inflation fails to slow in 2013 despite rate hikes

Fri Jan 10, 2014 1:19pm EST

* Consumer prices rise 5.91 pct in 2013 vs 5.84 pct in 2012
    * IPCA consumer price index jumps 0.92 pct in December
    * Stubbornly high inflation a major challenge for Rousseff


    By Silvio Cascione
    BRASILIA, Jan 10 (Reuters) - Inflation in Brazil ended 2013
higher than expected after surging in December, stymieing
President Dilma Rousseff's hopes that a flurry of aggressive
interest rate hikes and tax breaks for key industries would tame
consumer prices. 
    The IPCA consumer price index rose 5.91 percent
in 2013, up from 5.77 percent in the 12 months through November,
statistics agency IBGE said on Friday. That was also well above
market expectations for an increase of 5.82 percent, according
to the median forecast of 22 economists in a Reuters poll.
    Stubbornly high inflation poses a major challenge for
Rousseff, who plans to run for re-election in October. If the
central bank raises rates too much, it could send the economy
into a recession; if not, price increases could dampen consumer
confidence and even rekindle street protests as seen last year.
    Seeking to put a positive spin on the numbers, Rousseff
touted the "historic" fact that inflation has averaged less in
her first three years in office than in the equivalent period
under her two predecessors - a comparison some analysts called
dubious because those governments inherited much higher
inflation rates.    
   "The dragon of inflation that terrorized the lives of
Brazilians through the 1990's is definitely a thing of the
past," she said on her official Facebook page, which is managed
by her Workers' Party. 
    Analysts said the inflation woes raise the risk that
Rousseff's administration will continue to take one-off measures
to curb price increase at the expense of public finances.
    "This is bad news," said Tatiana Pinheiro, an economist with
Santander Brasil. "Services prices keep rising nearly 9 percent
a year, over 60 percent of all goods and services had price
increases, and the headline inflation rate ended the year well
above the 4.5 percent midpoint of the target range."
    The government was hoping that a string of six straight
interest rate increases and lower taxes on consumer goods such
as cars and home appliances would keep inflation from piercing
the 5.84 percent rate recorded in 2012.
    While those policies prevented inflation from overshooting
the government's target ceiling of 6.5 percent, the IPCA ended
2013 above the 4.5 percent center of the target range for the
fourth year in a row.
     The government stressed that the outlook for 2014 is better
and that the days of runaway prices in Brazil will not return.
    "The important thing is that inflation remains within the
target range. Inflation is under control and there are no
expectations at all that it will get out of control in the
future," Deputy Finance Minister Dyogo de Oliveira told
reporters in Brasilia.
    Economists see a less reassuring outlook.
    Inflation is expected to climb further to 5.97 percent in
2014 and could remain above the center of the target range until
at least the end of 2017, according to a weekly central bank
poll of about 100 economists. 
    Consumer price gains have failed to slow even as Brazil's
economy contracted in the third quarter for the first time in
four years. 
    On a monthly basis, the IPCA index rose 0.92
percent in December, above the 0.82 percent median forecast of
28 economists. A steep increase in air fares and fuel prices led
inflation higher last month, driving transportation costs 1.85
percent up from November.
    In a short statement, central bank president Alexandre
Tombini said inflation was more resilient than expected in 2013
due to a depreciating currency, a tight labor market and rising
transportation costs. 
    
    CENTRAL BANK AT CROSSROADS
    Yields on interest rate futures rose as traders
increased bets that the central bank would raise interest rates
by 50 basis points in a policy meeting next week.
    Brazil's benchmark interest rate stands currently at 10
percent, the highest among the world's major economies, and is
expected to climb to 10.5 percent by end-2014 - a far cry from
the record low 7.25 percent rate seen until last April. 
    However, many economists still think that the central bank
will slow the pace of rate hikes to see how the economy reacts
to the monetary tightening implemented in 2013. Most of
Rousseff's popularity stems from record-low unemployment rates,
a legacy of the fast economic growth seen during Luiz Inacio
Lula da Silva's administration in the last decade.
    "This is an election year. Part of the job will likely be
left for later," said Fernando Parmagnani, an economist with
Rosenberg & Associados, in Sao Paulo. "The central bank is in a
much more delicate position now."
    Fearing a sharper economic slowdown, Rousseff's government
might be tempted to take ad hoc measures to prevent inflation
from surging past 6 percent, wrote Gustavo Rangel, Latin America
economist with ING.
    One of the measures taken in 2013 was delaying gasoline
price hikes by state-run oil major Petrobras, which
helped keep a lid on inflation forcing the company to sell fuel
at a loss.
    The tax breaks offered to key industries also hurt public
finances, which, coupled with a steady increase in government
spending, has fueled market concerns of a possible credit
downgrade by ratings agencies this year.
    Government-regulated prices rose just 1.52 percent in 2013,
while freely determined prices jumped 7.30 percent.
    
    Below is the result for each price category:     
    
                               December    November
 - Food and beverages          0.89        0.56
 - Housing                     0.52        0.69
 - Household articles          0.89        0.38
 - Apparel                     0.80        0.85
 - Transport                   1.85        0.36
 - Health and personal care    0.41        0.41
 - Personal expenses           1.00        0.87
 - Education                   0.05        0.08
 - Communication               0.74        0.40
                                           
 - IPCA                        0.92        0.54