Annual inflation in Brazil hit a six-year high in September, government data showed Friday, adding to worries that a central bank interest rate cut might have been premature in the face of above-target price rises.
The benchmark IPCA consumer price index rose 7.31 percent in the 12 months through September — above the official target range ceiling of 6.5 percent for the sixth straight month and the highest 12-month rate since May 2005.
Even though policymakers reckon annual inflation likely peaked last month, economists nevertheless fret that a global slowdown will not ease price pressures in Latin America's biggest economy quickly enough.
Since inflation at the end of last year was high, analysts said the 12-month rate will fall but the extent of the coming slowdown in price rises remains uncertain.
"Annual inflation is going to slow but that does not mean we're going to be in a benign inflation trend," said Flavio Serrano, an economist with investment bank Espirito Santo.
"A subdued inflation outlook would be convergence to 4.5 percent and we don't see that happening. This year we're going to be above that and next year we'll be around 5.5 percent or 6 percent," he added.
The central bank unexpectedly cut its benchmark Selic interest rate 50 basis points to 12 percent in August, citing the potential effects of the euro zone sovereign debt crisis and a fragile U.S. economy.
But with Brazilian workers striking for higher salaries amid near record-low unemployment and a weakening currency making imports more expensive, economists worry that the rate cut was too risky.
They are not the only ones worried — inflation has been a topic of conversation across Brazil, from the toniest neighborhood to the favelas, or slums, as costs for everything from the lavish children's parties common among upper-income levels to staple foods have shot up.
That poses a dilemma for President Dilma Rousseff. Brazilian voters have long memories of runaway consumer prices in years past and will almost certainly punish any politician that lets even a whiff of those years return.
Brisk inflation especially hurts lower-income voters, the power base of Rousseff's Workers' Party.
"I remember the times when you bought a loaf of bread for one price and the next day it could be twice as much. I'm still very afraid of that happening again," said Antonio de Moura, a 48-year-old security guard in the capital Brasilia.
MORE INFLATION, MORE PROBLEMS
Complicating the fight against inflation, Rousseff has also made clear that she wants Brazil's sky-high interest rates to come down in line with global peers such as China and India.
Brazilian rates are the highest of major world economies, drawing foreign investors who pour in money to chase high returns and just as quickly withdraw those funds.
Central bank chief Alexandre Tombini says annual inflation probably peaked in September, with the rate expected to slow through year-end and into 2012.
In a quarterly inflation report at the end of September, the central bank said "moderate adjustments" to rates are consistent with taking inflation back toward the 4.5 percent center of its target range in 2012.
Analysts see those remarks, among others, signaling that rate cuts will continue, perhaps at the same 50-basis-point pace seen in August.
The IPCA index rose 0.53 percent in September from August, quicker than the 0.37 percent pace in the previous month but in line with the 0.54 percent expected in a Reuters poll.
Yields on longer-dated interest rate futures contracts rose, signaling that the market sees the central bank becoming less aggressive in its rate-cut cycle. The yield on the highly traded January 2013 contract rose as high as 10.5 percent from 10.38 percent at the open.
The bank expects the IPCA to rise 6.4 percent this year, barely inside its target range of 4.5 percent plus or minus 2 percentage points.
Economists, however, see the rate at 6.52 percent by year-end, which would mark the first year above the target ceiling since 2003.
As head of the central bank, Tombini would then be required by law to write an open letter to the Finance Minister explaining why that happened and what policymakers are doing to fix the problem.
The bank's monetary policy committee's next interest rate decision is scheduled for Oct. 19.
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