Brazil's 2022 inflation slows sharply, misses government target

Consumers shop at a weekly street market in Rio de Janeiro, Brazil, September 2, 2021. REUTERS/Ricardo Moraes

BRASILIA, Jan 10 (Reuters) - Brazil's inflation ended 2022 with a sharp slowdown from double-digit peaks seen throughout the year on the back of fiscal measures and an aggressive monetary policy tightening, but once again missed the government's official target.

The benchmark IPCA consumer price index rose 5.79% last year, statistics agency IBGE said on Tuesday, higher than the 5.60% median forecast in a Reuters poll of economists.

The result missed both the central bank's annual target of 3.5% and the top 5% of its tolerance band, marking the second straight year that it had done so.

Central bank chief Roberto Campos Neto, who is legally required to publish a letter justifying the inflation target miss, said the result was affected by inertia from 2021 inflation and higher commodity prices, also mentioning imbalances between demand and supply, shocks in food prices and pressures arising from the recovery in services and employment.

He said policymakers have taken the necessary steps to ensure inflation reaches its targets until 2025, reinforcing they will remain vigilant to see if keeping interest rates at the current 13.75% level for long enough will ensure such convergence.

The index was up 0.62% in December alone, IBGE said, above the 0.45% forecast in a Reuters poll.

Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, noted that disinflation continues in Brazil, helped by tight financial conditions, stuttering economic growth, and broad tax waivers to bring prices down.

"Inflation should continue to decline over the next three to six months, though at a more modest pace than in the second half, assisted by the recent fall in oil prices," he wrote in a note to clients.

In 2022, the central bank continued its aggressive monetary tightening to battle inflation, lifting its key interest rate from a record low of 2% in March 2021. Since September, policymakers have left rates unchanged at their cycle-high.

William Jackson, chief emerging markets economist at Capital Economics, said the higher-than-expected 2022 inflation coincided with growing fiscal concerns after leftist President Luiz Inacio Lula da Silva secured the approval of the Congress to boost welfare spending.

That will give the central bank "more cause to delay the start of its easing cycle," Jackson said.

According to IBGE, inflation last year was mainly impacted by the increased costs of food and beverages (+11.64%) and health and personal care items (+11.43%).

Overall 12-month inflation was in double digits until July last year, affected by surging commodity prices triggered by the war in Ukraine.

But the government of former President Jair Bolsonaro took measures to ease prices before an October presidential election, including a costly tax waiver on fuels that was recently extended by Lula.

Congress also approved last year a reduction in state taxes for a range of key items, including energy, telecommunications and fuels.

As a result, the transport group had a negative contribution of 1.29% to inflation in 2022, driven by the 25.78% drop in gasoline prices.

State-run oil giant Petrobras (PETR4.SA) contributed to the disinflationary trend, adopting a series of price cuts when international oil prices settled.

Reporting by Marcela Ayres; Editing by Steven Grattan, Paul Simao and Marguerita Choy

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