Brazil inflation rate prompts concerns

Economists are forecasting Brazil's economy will expand by 3.5% this year, but the figure could be lower.

Story highlights

  • Brazilian inflation in December was 5.84% year-on-year despite estimated growth of 1%
  • The central bank is keen to keep credibility of inflation-targeting as prices remain a sensitive issue
  • Brazil's present economic stability is based largely on vanquishing runaway inflation
  • Short-term growth will depend on whether the government implements cuts in electricity tariffs

Brazilian consumer prices ended 2012 near the top of the central bank's target range for the third year running, prompting concern from economists that the country is stuck in a phase of low growth and high inflation.

Brazilian inflation in December was 5.84 per cent against a year earlier -- well above the middle of the central bank's target zone of 4.5 per cent plus or minus two percentage points -- despite economic growth last year that was estimated to have been only about 1 per cent.

"This tolerance about inflation means industrial costs and other costs are going up and the country is [becoming] increasingly uncompetitive," said Alberto Ramos, an economist at Goldman Sachs.

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The central bank, which said the December consumer prices figure was on track with its forecasts, is keen to maintain the credibility of its inflation-targeting regime in a country where prices remain a sensitive issue.

Brazil's present economic stability is based largely on its achievement in vanquishing runaway inflation, which in earlier decades was measured in hundreds rather than single-digit percentage points.

Alexandre Tombini, the governor of the Central Bank of Brazil, said the 2012 figure was less than in 2011, when inflation touched the top of the bank's range of 6.5 per cent. Inflation was therefore "converging" towards the centre of the target as the bank had promised.

"The inflation target was complied with for the ninth consecutive year running," he said in a statement.

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Mr Tombini said inflation was boosted in the second half of 2012 by several "shocks", such as a rise in the price of agricultural commodities. "In the short term, inflation is showing some resistance, but there are indications it will return to a downward trend in 2013."

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Economists said they did not expect inflation this year to breach the upper end of the central bank's target range because economic growth was predicted to remain relatively lacklustre.

Many economists are forecasting the economy will expand by 3.5 per cent this year, but see the possibility that the figure could be lower.

Much would depend on whether the government would be able to implement a cut in electricity tariffs, which will lower prices for consumers by as much as 16 per cent, said Capital Economics.

"In the absence of an immediate cut in tariffs, inflation is likely to rise above 6 per cent in the first quarter of this year," added the London-based research house.

Mr Ramos from Goldman Sachs said the elevated inflation figures and lacklustre growth rates were the symptoms of a policy mix based on government intervention. Brazil's efforts to protect local industries through trade barriers and by weakening its exchange rate meant the country was not benefiting from global deflationary trends.

Instead, the government was trying to control inflation through unorthodox measures, such as limiting the price of petrol or slashing electricity tariffs and taxes on car sales.

These had distortionary knock-on effects in the economy that affected investment and the country's capacity to grow.

By controlling what Petrobras, the state-run oil producer, charged for petrol, for instance, the government was limiting the cash the company had left over for investment.

Mr Ramos said: "Brazil is not condemned to stay in this situation of poor growth and high inflation, but it will be limited in terms of its capacity to deliver high growth and by that I mean above 4 per cent."

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