UPDATE 2-Brazil's inflation slows more than expected in January

Fri Feb 7, 2014 8:46am EST

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* 12-month rate drops to 5.59 pct from 5.91 pct in Dec
    * Monthly increase was the lowest for January since 2009
    * Drop in airfares help offset food inflation


    By Silvio Cascione
    BRASILIA, Feb 7 (Reuters) - Brazil's inflation slowed more
than expected in January thanks to a sharp decrease in airfares,
but investors held their bets on another sharp interest rate
hike as price pressures are expected to pick up again in coming
months.
    Brazil's benchmark IPCA consumer price index 
rose 5.59 percent in the 12 months through January, government
statistics agency IBGE said on Friday, below the 5.67 percent
median forecast in a Reuters poll. 
    The annual inflation rate stood at 5.91 in December.
    On a monthly basis, the IPCA index rose 0.55
percent, the smallest increase for January since 2009. It also
was much lower than the 0.92 percent IPCA rise in December. 
    High inflation has been a major headache for President Dilma
Rousseff, who will bid for a second term later this year. 
    It has dented consumer spending, one of the few growth
engines in Brazil until recently, and prompted Brazil's central
bank to raise interest rates seven times since April to their
current 10.50 percent.
    Yields on interest rate futures dropped only slightly , with most investors sticking to their bets on another
50 basis-point hike in interest rates by the central bank at its
next policy meeting on Feb. 25-26.
    "We don't expect this slowdown to continue going forward. A
weaker exchange rate, the difficulties in keeping
government-regulated prices as low as in 2013 and less favorable
calendar effects will probably push inflation higher over the
next few months," said Enestor dos Santos, BBVA Brazil
economist.
    Inflation will likely end this year at 6.00 percent,
according to the median forecast in a central bank poll with
over 100 institutions. 
    While the January inflation slowdown sits well with
Rousseff's priorities, most of the slide was due to a
15.8-percent drop in airfares. 
    Food staples, which make up for nearly a quarter of the
inflation index, had another sharp increase in January, 0.84
percent, compared to 0.89 percent in December.
    Complaints about exorbitant prices have gone viral on
Brazilian social media, with several online communities
dedicated to denouncing the "surreal" prices charged by bars and
restaurants from Fortaleza to Rio de Janeiro -- where a shrimp
omelet could cost as much as 99 reais ($44).
    Brazilians may also see higher energy costs as a severe
drought dries up hydroelectric dams reservoirs and forces the
use of more expensive thermal power plants. Analysts say
Rousseff's government could cover that extra cost with loans to
power distributors, but room for action is seen limited as a
fast increase in public expenses over the past few years has
already raised the threat of a credit downgrade.
    The average of the three main core measures dropped to 0.52
percent in January from 0.70 percent in December. The so-called
diffusion index, which measures the proportion of goods and
services that had price increases, rose to 71.6 percent from
69.3 percent in December.
    Airfares dropped in January after a sharp increase in the
end-year holiday season. Brazil, which will host the soccer
World Cup in June and July, authorized nearly 2,000 new domestic
flights to lower prices for the hundreds of thousands of
tourists expected during that period. 
    The central bank targets inflation at 4.5 percent, with a
tolerance margin of 2 percentage points.
            
    Below is the result for each price category:
        
                               January     December
 - Food and beverages          0.84        0.89
 - Housing                     0.55        0.52
 - Household articles          0.49        0.89
 - Apparel                     -0.15       0.80
 - Transport                   -0.03       1.85
 - Health and personal care    0.48        0.41
 - Personal expenses           1.72        1.00
 - Education                   0.57        0.05
 - Communication               0.03        0.74
                                           
 - IPCA                        0.55        0.92
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