SAO PAULO: Brazil's annual inflation raced to a six-year high in August, lifted by food prices and a tight labor market even as the economy cools and the central bank switches gears from interest rate hikes to rate cuts.
Inflation in the 12 months through August rose to 7.23 percent, its highest since June 2005, the government said on Tuesday, compared to 6.87 percent in the 12 months through July and policymakers' target ceiling of 6.5 percent per year.
The report from statistics agency IBGE represents the first government price data since the central bank cut interest rates on Aug. 31 by 50 basis points in a surprise move following five consecutive rate hikes this year.
Brazil's benchmark IPCA consumer price index rose 0.37 percent in August, IBGE said, following a 0.16 percent increase in July and a 0.15 percent rise in June
For some analysts, the August inflation data -- accelerating to its fastest monthly pace since May as expected -- reinforces concerns that the central bank took its eyes off stubbornly high inflation due to concerns about the global economic slowdown.
"The numbers show the central bank's move may have been a little hasty," said Luciano Rostagno, chief strategist for CM Capital Markets in Sao Paulo. "We see a situation where despite a slowdown abroad, domestic demand remains strong, especially for services."
Gross domestic product data released Friday showed Brazil's economy is slowing from torrid growth last year, but the labor market remains tight, fueling higher wages and spending.
Food prices also drove nearly half of August's price increases, IBGE said, rising 0.72 percent in the month after slipping 0.34 percent in July.
Rostagno said seasonal factors that have depressed prices since June have now evaporated and he expects monthly inflation will accelerate to 0.45 percent in September.
INTEREST RATE FUTURES SLIP
For August, the IPCA had been expected to rise 0.36 percent, according to the median forecast of a dozen economists in a Reuters survey. Estimates for the increase ranged from 0.30 percent to 0.39 percent.
Despite the nagging inflation worries, the central bank shocked markets last week by cutting its key rate to 12 percent, citing the economic risks of a dimmer global outlook that could worsen a slowdown in Brazil.
Yields on interest rate futures contracts fell in Tuesday trade, signaling growing expectations for further interest rate cuts amid heightened concerns about the euro zone's sovereign debt crisis. The yield on the highly-traded January 2013 contract fell to 10.53 percent from 10.586 percent at Monday's close.
Copyright Reuters, 2011
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