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WRAPUP 1-Brazil labor market still tight, stoking inflation
July 19, 2011 / 7:05 PM / 6 years ago

WRAPUP 1-Brazil labor market still tight, stoking inflation

* Brazil jobless rate falls to 6.2 pct, lowest since Jan

* Economy adds 215,393 payroll jobs in June, wages rise

By Luciana Lopez

SAO PAULO, July 19 (Reuters) - Brazil’s labor market tightened in June, data showed on Tuesday, underscoring the dilemma facing the country’s central bank as policymakers try to slow inflation without abruptly braking economic growth.

The economy added a net 215,393 payroll jobs in June, and the unemployment rate slipped to 6.2 percent from 6.4 percent in May. The higher demand for workers also helped boost wages, which rose 0.5 percent from May and jumped 4 percent from June of last year.

“You can’t say the market isn’t still tight ... 215,000 jobs is a lot of additions,” said Marcelo Gazzano, an economist with RBS in Sao Paulo. “This could be a source of doubt for the central bank’s strategy.”

Average real wages, or salaries discounted for inflation, rose to 1,578.50 reais ($1,002) a month, almost three times the monthly minimum wage of 545 reais.

A steady increase in wages in a wide variety of industries from services to construction has helped stoke inflation in the past year, creating a major headache for President Dilma Rousseff and her central bank chief, Alexandre Tombini.

While rising salaries are benefiting Rousseff’s political base of Brazil’s working poor and emerging middle class, the resulting pressure on consumer prices has forced the central bank to raise interest rates four times this year.

Brazilian policymakers meet on Wednesday, and markets expect another interest rate hike, this time to 12.5 percent from 12.25 percent.

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Brazilian interest rates: r.reuters.com/sej89r

For a story on Brazil’s labor market: [ID:nN1E76H0AC]

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So far, the interest rate hikes have been unable to bring inflation back on target. Brazil’s official inflation rate reached 6.71 percent in the 12 months through June, well above the central bank’s target of 4.5 percent plus or minus 2 percentage points.

Rising wages could push inflation still higher in coming months because workers flush with cash could wind up spending more money, sending prices up for everyone.

“Eventually it would be important to see a minor reversal in order to alleviate the inflationary pressures coming from a tight labor market and higher wages,” wrote Paulo Leme of Goldman Sachs in a note to clients.

SLOWING ECONOMY TO COOL LABOR MARKET

Higher interest rates are expected to help rein in inflation by the end of the year. But they also threaten to slow the economy too much by discouraging consumption and drive up the cost of credit for companies looking to invest.

Another byproduct of Brazil’s sky-high interest rates: a flood of hot money from abroad in search of juicy returns, fueling a currency rally that is hurting Brazilian exporters.

Latin America’s biggest economy grew 7.5 percent last year, a pace that many economists say is unsustainable given Brazil’s massive infrastructure deficiencies. A number of government and central bank measures, including higher interest rates, lower public spending and other credit controls, have helped slow that pace of growth to an expected 4 percent this year.

Given those measures, as well as an uncertain economic outlook abroad, “we continue to expect a gradual slowdown of the labor market over the year,” wrote Luciano Rostagno, chief strategist of CM Capital Markets.

Brazil likely needs an unemployment rate of about 7 percent to keep from pressuring inflation, Gazzano said.

“There are sectors that are doing really well, like construction,” he said. “But you can’t say this is a one-off, like if you subtract one sector things are OK. This is a general thing.” ($1=1.575 Brazilian reais) (Additional reporting by Isabel Versiani in Brasilia and Rodrigo Viga Gaier in Rio de Janeiro; Editing by Todd Benson and Padraic Cassidy)

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