Brazil's January inflation seen at highest rate since 2003

BRASILIA (Reuters) - Consumer prices in Brazil probably rose at the fastest pace in nearly 12 years in January as regulated prices for transportation and electricity soared, reflecting President Dilma Rousseff’s new approach to fixing the country’s beleaguered economy.

Inflation as measured by the benchmark IPCA index BRCPI=ECI probably rose to 1.24 percent in January from December, up from 0.78 percent in the previous month, according to the median forecast of 45 economists polled by Reuters.

That would be the highest monthly rate since February 2003. Data is due out on Friday, at 9 a.m. (1100 GMT).

In the 12 months through January, inflation BRCPIY=ECI likely rose to 7.14 percent, well above the government's 4.5 percent target and the 6.41 percent rate notched in December, according to the median of 43 forecasts.

For years, Rousseff had been criticized by investors for trying to rein in inflation by delaying increases in prices and other costs under the government’s control, such as electricity.

Intent on winning back investor confidence and fending off a credit downgrade, she changed tack after narrowly winning re-election in October. Economists say the pent-up price pressures are so high that inflation could stay above 7 percent throughout 2015, even as the central bank jacks up interest rates.

“You have got electricity, gasoline, bus fares, taxi, metro fares, among other government-regulated prices that will maintain strong pressure throughout the year,” said Cristiano Oliveira, an economist with Banco Fibra, in Sao Paulo.

“Prices are set to rise 3 percent in the first three months of the year alone. That’s two-thirds of the government’s target, all in just one quarter.”

Brazil’s central bank expects regulated prices to rise 9 percent in 2015, according to the minutes of its last policy-setting meeting, when it raised interest rates to 12.25 percent despite growing fears of a broad economic recession.

Gasoline prices are also up after Finance Minister Joaquim Levy raised taxes to plug a widening budget gap and state-run Petroleo Brasileiro SA PETR4.SA opted not to pass lower global oil prices onto consumers. The impact of higher fuel prices on the inflation rate will only be felt in February, though.

Food prices are also expected to rise sharply, driven by a historic drought that also threatens to cause severe water rationing in Brazil’s largest city and financial hub, Sao Paulo.

Forecasts for the monthly inflation rate in January ranged from 0.70 percent to 1.30 percent, while estimates for the 12-month rate varied from 6.57 percent to 7.20 percent.

Reporting by Silvio Cascione; Editing by Christian Plumb