Brazil's Inflation May Hit 2 1/2-Year High in June: Week Ahead

By Joshua Goodman
2008/07/07
July 7 (Bloomberg) -- Brazil's inflation rate probably rose to the highest in 2 1/2 years in June, adding pressure on the central bank to increase interest rates further.
The government's benchmark IPCA index, scheduled for release July 11, jumped to 6.1 percent in the 12 months to June from 5.58 percent in May, according to the median estimate of 15 economists surveyed by Bloomberg. Consumer prices rose 0.81 percent in June, the survey shows.
The central bank raised interest rates twice since April, to 12.25 percent from a record-low 11.25 percent, in a bid to cool inflation running above the 4.5 percent midpoint of the government's target range since January. Policy makers will lift rates by half a percentage point again this month, according to a central bank survey of about 100 economists released a week ago.
``Right now the market is focused entirely on inflation,'' said Roberto Padovani, senior strategist for Banco WestLB AG in Sao Paulo, who estimates the June monthly jump in prices at 0.84 percent.
Inflation is being stoked by food costs, which are rising globally because of demand from Asian economies.
In Brazil, the problem is being exacerbated by an expanding economy. Domestic spending on home appliances, cars and electronics offset declining exports and powered economic growth of 5.8 percent in the first quarter, its fastest January-March expansion since 1995.
``More than the headline numbers, investors will be dissecting the IPCA's individual components,'' said Pedro Tuesta, senior Latin America economist at 4Cast Inc. ``There's a feeling inflation is spreading beyond food prices and that's what's guiding the central bank's action right now.''
Signs of Slowdown
There are signs the economy may be cooling. Industrial production in May slowed to 4.2 percent compared with a 10.1 percent annual jump the previous month, the national statistics agency announced last week.
Still, most economists think Brazil's battle with inflation isn't over. The IGP-M price index, the broadest measure of consumer, construction and wholesale prices, rose 1.98 percent in June, the fastest in more than five years, a June 27 report showed.
``So long as incomes and credit continue to rise, inflation fears will remain,'' says Tuesta, who expects June inflation of 0.74 percent.
Last week, Raymond James Latin America cut its 2009 growth forecast for Brazil to 3.3 percent from 4.3 percent on expectations that the central bank will lift interest rates more than previously forecast to 14.50 percent by year's end.
Other economists will weigh in today when the central bank releases its weekly survey of indicators with estimates from about 100 banks and brokerages. In the last survey, economists predicted a year-end rate of 14.25 percent while raising for the 14th straight week their year-end inflation forecast to 6.3 percent.
Finance Minister Guido Mantega, speaking to congress last week, warned that ``sounding alarms about inflation can turn contagious.''
Markets
Last week, the real fell 0.8 percent to 1.6070 per dollar, from 1.594 the previous week, the biggest decline in six weeks. The yield on the government's zero-coupon bond due January 2010 rose almost 0.4 percentage point to 15.49 percent, according to Banco Bradesco SA.
The benchmark Bovespa index fell 7.7 percent to 59365.35 points along the week. Cosan SA Industria & Comercio, the world's biggest sugar-cane processor, 7 percent, while Gol Linhas Aereas Inteligentes SA lost 24 percent.
Aracruz Celulose SA, the world's biggest eucalyptus-pulp maker, will report today second-quarter profit fell to 244.7 million reais ($152 million) from 321.5 million reais a year ago, according to the average estimate of three analysts compiled by Bloomberg News.
The following is list of events in Brazil this week:

Event Date
Aracruz earnings 7/7
IBGE Inflation IPCA 7/11
FGV Preview Inflation IGP-M 7/11