Brazil July inflation steady, fuel costs pick up

SAO PAULO: Inflation in Brazil held nearly steady in July from June on a rise in fuel prices, but turbulence in the global economic outlook kept analysts unsure about where consumer prices are headed this year.

Brazil's benchmark IPCA consumer price index  rose 0.16 percent in July, barely higher than the 0.15 percent rise in June, the government's statistics agency IBGE said on Friday. The index was expected to rise 0.18 percent, according to the median forecast of 21 economists surveyed by Reuters.

"Thus far, IPCA is following its expected track, with food prices being lower than they normally are for this time of the year, masking slightly higher service prices and the rebound in transportation and fuel prices," Paulo Leme of Goldman Sachs told clients in a note.

Leme added that key drivers of inflation, including commodity prices and Brazil's economic growth, remain uncertain given current doubts about the global economic environment.

A bruising fight over the US budget managed to avert a default this week but raised doubts about that country's growth in coming months and years. At the same time, worries about a euro zone sovereign debt crisis have intensified, with both Spain and Italy coming under investor scrutiny.

Brazilian inflation in the 12 months through July sped to 6.87 percent, above a government target for the fourth straight month. Brazil's central bank is targeting inflation of 4.5 percent plus or minus 2 percentage points this year.

Twelve-month inflation picked up from 6.71 percent through June and is expected to keep accelerating because monthly inflation rates at this time last year were lower. In July 2010, for example, consumer prices crept 0.01 percent higher from a month earlier.

Economists forecast inflation of 6.31 percent in 2011 and economic growth around 4 percent for the year, according to the latest weekly central bank survey.

Brazil's economy grew 7.5 percent last year, the fastest in 24 years and one of the most robust rates among major economies, but analysts said that rate was unsustainable.

The stubbornly high annual inflation rate has become a major headache for President Dilma Rousseff, whose first year in office could be overshadowed by rising prices.

The central bank has raised interest rates five times this year by a cumulative 175 basis points to try to rein in prices. At 12.50 percent, Brazil's benchmark Selic rate is one of the highest of the world's major economies.

Rousseff has promised to cut about $30 billion from the budget to try to shift some of the burden for cooling the economy to fiscal policy from interest rates.

A strong currency also complicates monetary policy the higher borrowing costs tend to attract foreign money as investors chase Brazil's high yields, fueling a currency rally to 12-year highs. The strong currency in turn hurts exporters, who find their goods more expensive abroad.

Copyright Reuters, 2011