Brazil mid-month inflation slowest in 10 months

Brazil's benchmark IPCA inflation index rose 0.23 percent in the month to mid-June, slowing from the 0.7 percent to mid-May, government statistics agency IBGE said on Tuesday.

The mid-June figure was the index's lowest reading since August.

The index was expected to rise 0.17 percent in the month to mid-June, according to the median forecast of 13 economists surveyed by Reuters. Estimates for the IPCA increase ranged from 0.11 percent to 0.25 percent.

Inflation slowed as fuel prices in particular dropped. The price of ethanol, widely used in Brazilian cars, had spiked earlier this year but has recently tumbled as the sugar cane harvest enters full swing.

Yields on interest rate futures contracts were little changed after the data.

At 6.55 percent, 12-month inflation through mid-June remained unchanged from the reading through May. The year-over-year inflation rate earlier this year topped the central bank's target ceiling of 6.5 percent.

Policymakers have taken a gradual approach to bringing inflation back to target to try not to derail growth in Latin America's biggest economy, expected to reach about 4 percent this year, down from a surge of 7.5 percent last year.

This month the central bank raised its benchmark Selic interest rate to 12.25 percent from 12 percent. Policymakers hinted that more tightening could be on the way but added in minutes to that meeting that 12-month inflation was expected to slow in the fourth quarter.

Inflation has become a political headache for President Dilma Rousseff, whose first year in office could be overshadowed by worries about consumer prices. Brazilian voters have long memories of runaway prices in previous decades, and spiking prices could erode Rousseff's ability to pass a tax overhaul and other changes.

So far Brazil's central bank has raised rates by a total of 150 basis points this year from 10.75 percent at the close of last year, with the Selic among the highest rates in major economies.

Central bank President Alexandre Tombini credited the "effectiveness of the current economic policy" with helping the country secure a ratings upgrade from Moody's on Monday. The upgrade puts Brazil firmer into investment grade territory.

The monetary tightening also puts Brazil among a group of powerhouse emerging markets, including India and China, that are paying the price for robust growth with rising consumer prices. While those countries are clamping down on credit, the International Monetary Fund last week warned that room remains to tighten policy to avoid overheating.

In contrast, many major economies continue to struggle. Weaker data in the United States and an ongoing sovereign debt crisis in Europe have underscored the anemic recovery in those areas, where interest rates remain low.

Copyright Reuters, 2011