UPDATE 2-Brazil March inflation at highest for the month in 11 years

Wed Apr 9, 2014 10:33am EDT

(Adds comments, market reaction, reference to Mexico inflation)
    By Silvio Cascione
    BRASILIA, April 9 (Reuters) - Brazil's rate of inflation in
March picked up at the quickest pace in 11 years for that month,
challenging the central bank's plan to stop raising interest
rates soon and complicating President Dilma Rousseff's chances
of re-election.
    Brazil's benchmark IPCA consumer price index 
jumped 0.92 percent in March from February, exceeding all 37
forecasts in a Reuters poll. It was the steepest increase for
the month since 2003, statistics agency IBGE said on Wednesday.
    In the 12 months through March, consumer prices 
rose 6.15 percent, inching closer to the central bank's target
ceiling of 6.5 percent.
    Food prices increased 1.92 percent from February as
irregular rainfall in southern Brazil early this year hurt
crops. Prices of basic staples such as tomatoes, potatoes and
beans spiked more than 10 percent in March from February.
    Fuel costs also rose sharply, with ethanol biofuel jumping
4.07 percent from February.
    Brazil's inflation is quickening right when the central bank
has signaled it may end a year-long campaign of interest rate
increases. The bank raised its benchmark Selic rate 
for a ninth straight time last week to 11 percent, and said it
will monitor the economic situation to decide whether to raise
rates again next month.
    "With inflation probably nearing the target ceiling in May,
it will be very hard for the central bank not to raise interest
rates at least once more," wrote economists with local research
firm Rosenberg & Associados in a note.
    Yields on interest rate futures <0#2DIJ:> rose as traders
added bets on future rate increases by the central bank. 
    Inflation is expected to breach the central bank's target
ceiling in coming months, according to a recent Reuters poll,
and some estimates show it is unlikely to ease below 6 percent
over the next 21 months, denting consumer confidence and keeping
pressure on politicians.
    The IBGE numbers continued to show widespread price
pressures. Services prices rose 9.09 percent on an annual basis,
up from 8.18 percent in the prior month as salaries continue to
increase on a tight labor market.
    And the so-called diffusion index, a measure of the
proportion of goods and services with price increases in the
month, rose to 71 percent in March from 64.3 in February,
according to calculations by Sao Paulo-based Banco Fator.
    What could still tilt the balance in favor of stable
interest rates in May is the possibility that the shock in food
prices is only temporary and a stronger real, said
Rodrigo Melo, chief economist at asset management firm Icatu
Vanguarda.
    "It was an ugly number. But I think it will not have much of
an influence over the next central bank's decision. Until then,
we'll see inflation data for April and for early May."
        
    STRONGER CURRENCY
    Higher inflation also probably means the central bank will
not try to curb a recent currency rally, said Enestor dos
Santos, an economist with BBVA in Madrid. Brazilian authorities
have long complained that a stronger real makes local companies
less competitive, but it also lowers the prices of imports,
which could help tame inflation. 
    Stubbornly high inflation was one of the main reasons for a
recent drop in Rousseff's approval ratings. 
    While she still maintains a comfortable lead in polls on the
October election, a recent survey showed more Brazilians want a
change in government policies, and twice as many Brazilians
think Rousseff's predecessor and mentor, Luiz InĂ¡cio Lula da
Silva, is more qualified than her to carry out changes.
 
    Brazil's price outlook contrasts with Mexico's, where
inflation fell below the central bank's 4 percent limit
according to data released on Wednesday. 
    "This adds to the reasons to expect Mexico to outperform
Brazil this year," wrote Neil Shearing and David Rees, emerging
market economists with Capital Economics, in London.
       
    Below is the result for each price category:     
    
                                    March    February
 - Food and beverages                1.92        0.56
 - Housing                           0.33        0.77
 - Household articles                0.38        1.07
 - Apparel                           0.31       -0.40
 - Transport                         1.38       -0.05
 - Health and personal care          0.43        0.74
 - Personal expenses                 0.79        0.69
 - Education                         0.53        5.97
 - Communication                    -1.26        0.14
                                                     
 - IPCA                              0.92        0.69
 
 (Additional reporting by Camila Moreira; Editing by Bernadette
Baum and Jeffrey Benkoe)
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