Brazil Inflation Hits Highest in a Decade

London (Financial Times) - Inflation in Brazil has hit the highest level in a decade, underlining the multitude of challenges facing the world’s second-largest emerging market.

Date: 07 March 2015 - 21:54

News ID: ۱۱۷۷۷

Consumer prices rose 7.7 per cent in the 12 months to February — the highest annual rate since May 2005 and one that exceeded even the most pessimistic forecasts among economists.
Electricity prices also rose sharply as Brazil’s hydroelectric dams struggle with the worst drought in 80 years, while education costs jumped almost 6 per cent since January.
"Inflation continues to accelerate and is quickly generalizing beyond the initial shock to regulated prices and administered prices,” said Goldman Sachs economist Alberto Ramos, adding that he expected the 12-month rate to accelerate beyond 8 per cent.
Brazil’s rapidly depreciating currency, which is trading at its weakest level against the dollar since 2004, is expected to add further inflationary pressure by making imports more expensive.
The inflation data released on Friday underscore the mind-boggling array of difficulties facing President Dilma Rousseff and her leftist Workers party (PT) as she embarks on her second term in government.
After luring investors with 7.5 per cent growth in 2010, Brazil’s economy now faces a toxic combination of economic contraction, high inflation and a growing budget deficit — partly the result of the PT’s populist economic policies.
A vast corruption scandal at Brazil’s heavily indebted state-controlled oil company Petrobras has also shaken confidence, casting doubts over the country’s political future and increasing speculation that Brazil will lose its prized investment grade credit rating.
Tackling inflation will be key to regaining investors’ trust, economists say, especially given the country’s painful memories of hyperinflation.
In particular, Brazil’s central bank must make sure that expected increases to administered prices such as the cost of electricity do not spread to the rest of the economy, said Mr Ramos. "After all, electricity and other regulated prices (fuel, water, etc) are an input cost in the production, distribution and sale of almost every good and service,” he said.
On Wednesday the central bank raised the country’s benchmark interest rate to 12.75 per cent — the highest level in six years — and it is expected to continue to tighten monetary policy in an attempt to bring inflation closer to the 4.5 per cent target.
Brazil’s new market-friendly finance minister Joaquim Levy and Ms Rousseff have also tried to deliver an austerity program to restore credibility to public finances but they have faced tough opposition in Congress.