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Analysis

Brazil’s Inflation Decelerates Marginally in October

By Bertrand Delgado and Juan Lorenzo Maldonado

Inflation

The general inflation index IGP-DI decelerated marginally in October to 1.03% m/m, as lower wholesale prices overweighed the increase in consumer prices. Wholesale prices (60% of the index) eased to 1.32%, with raw materials cooling rapidly as a result of lower corn, iron ore, and poultry meat prices. Final and intermediate goods pushed to the opposite direction. Final goods gained 1.54% m/m, following higher fresh food prices, while intermediate goods advanced by 0.41% m/m following higher manufacturing material prices. Consumer prices (30% of the index) accelerated by 0.59% m/m, driven by a 1.38% m/m increase in food prices—in particular vegetables, rice and dairy products. Transport prices pushed up with a 0.45% m/m increase, on the back of higher ethanol and gasoline prices. Pulling downwards, apparel practically halved to 0.58% m/m. Finally, construction prices (10% of the index) stayed practically unchanged, losing one basis point to 0.20% m/m on the back of lower material costs, balancing the 0.20% m/m increase in labor costs.

Figure 1: Brazil’s IGP-DI Inflation Index (m/m)

Source: FGV & Bloomberg

In yearly terms, the IGP-DI reached 9.11% y/y from 7.95% y/y last month. Wholesale prices reached two-digit inflation at 11.04% y/y from 9.51% y/y, while consumer prices continued to gain to 4.96% y/y from 4.36% y/y. Construction costs rested at 7.08% y/y from a previous 6.94% y/y.

Meanwhile, the weekly FIPE CPI cooled from last week, with a 0.97% m/m increase after a 1.04% m/m gain the last week of October. Food prices eased to 2.50% m/m, mirrored by transport and personal expenses, which came down to 0.85% m/m and 0.58%, respectively. Balancing dynamics came from apparel and health-care prices, which recovered to 0.03% m/m and 0.43% m/m, respectively.

Figure 2: Brazil’s FIPE Inflation Index (m/m)

Source: FIPE

In RGE’s view, high food prices and a positive output gap is keeping inflation elevated and inflation expectations on a deteriorating path. We have recently revised up our year-end 2010 inflation forecast to 5.5% from 5.2%.

G-20

At the G-20 meeting in Seoul, South Korea, Brazil’s Finance Minister Guido Mantega said that government expenditures and interest rates will fall in 2011, according to the local newspaper Estadao. Spending is not expected to contract but to decelerate and reduce as a share of GDP. According to Mantega, the Brazilian economy is now in a new growth phase, for which government stimulus is no longer needed and the private sector should take a bigger role driving the economy. Hence it is expected that credit and subsidies through the BNDES will be reduced. According to Mantega, reducing current spending will give space for more investment, and avoid pulling excessive capitals from abroad. Mantega also mentioned that there are no demand-pull pressures on the Brazilian economy and that inflation, both rising and falling throughout the year, has been caused by commodity and food prices. Finally, he highlighted president-elect Dilma Rousseff’s commitment to having lower interest rates, a 3.3% of GDP primary surplus through 2014, reduce the debt/GDP ratio to less than 30% and achieve a nominal fiscal surplus. Mantega stressed that the government will monitor and control inflation, but deems the inflation unlikely to rise in 2011, an optimum condition to achieve lower interest rates. Mantega, however, did not say anything about a continued tenure as finance minister during Rouseff’s presidency.

In Seoul, Mantega, also reiterated that the government may take further steps to slow appreciation pressures on the local currency, the Brazilian real (BRL), according to Bloomberg.

As stated in previous reports, we anticipate some fiscal consolidation in 2011, which should help in easing pressures on the central bank to hike rates, while the government should continue to ease strong appreciating pressures on the BRL.

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