In early November, Brazil’s inflation rate soared beyond expectations, compelling the government to expedite plans to reduce escalating public expenditures that are driving cost-of-living increases above the target.
Inflation Figures
Official data released on Tuesday revealed that consumer prices rose by 4.77% year-on-year, surpassing all forecasts in a Bloomberg survey of economists, which had a median estimate of 4.64%. On a monthly basis, prices increased by 0.62%.
Mid-Month Inflation in Brazil Hits 4.77%
Inflationary pressures are intensifying in Latin America’s largest economy, fueled by a historic drought and investor concerns over expanding government spending. The central bank has been raising interest rates since September to bring the annual inflation rate back down to its 3% target and has indicated it will continue this strategy if the situation does not improve.
Underlying Factors
Despite double-digit borrowing costs, a robust job market and strong consumer demand have mitigated the impact. However, Brazil’s worst-ever drought has adversely affected food and energy prices, with crops withering and utility regulators increasing prices.
Food and beverage prices surged by 1.34% in the first half of November, significantly contributing to inflation. Nearly all categories tracked by the statistics agency saw price increases, with only education costs slightly decreasing by 0.01%.
Airfare, a long-standing concern for Brazilians, jumped nearly 23% as the holiday travel season nears.
Expert Opinions
Economists were split on the implications of the inflation data released on Tuesday. Some viewed the price surge as a temporary spike due to airline ticket costs, while others believed it signaled that the central bank’s board, Copom, might need to implement more aggressive rate hikes.
“The continuous deterioration of short- and medium-term inflation expectations, and still strong growth momentum increase the probability that the Copom may have to accelerate the pace of rate hikes again, to 75 basis points,” wrote Alberto Ramos, chief Latin America economist at Goldman Sachs & Co. LLC, in a note.
Currency and Economic Outlook
The economic outlook is further complicated by the weakening of Brazil’s currency, the real, which has been one of the worst-performing emerging-market currencies this year. A weaker exchange rate exacerbates the cost of living by making imports more expensive.
Investors are eagerly anticipating President Luiz Inacio Lula da Silva’s plans to rein in government spending, which they view as increasingly unsustainable. An announcement is expected as early as this week.
“The risks are firmly skewed to the upside, especially if the ‘spending review’ fails to soothe fears that President Lula is not taking fiscal discipline seriously,” wrote Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics, in a research note.
