Brazil Inflation Jumps, Bumping Up Against Target Ceiling

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(Bloomberg) — Brazil’s inflation picked up in April on more expensive food and fuel, reaching the upper limit of the central bank’s target range.

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Official data released Tuesday show consumer prices gained 0.67% from a month earlier, nearly matching the 0.68% median estimate from analysts in a Bloomberg survey. From a year ago, inflation reached 4.39%, up from 4.14% in March.

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Interest rate swaps with contracts ending in January 2029, a gauge of market sentiment about monetary policy, rose more that 10 basis points in morning trading following the inflation print.

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The energy shock from the war in Iran is spreading through Latin America’s largest economy, causing pain at the pump and driving up grocery bills. Ahead of October’s elections, President Luiz Inacio Lula da Silva is trying to ease the strain on consumers’ wallets by providing subsidies and slashing taxes, which is further clouding the inflation outlook.

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Food and beverage costs climbed 1.34%, representing the largest contributor to April’s price gains, the statistics agency said. Transportation costs also picked up, though at a slower pace than the previous month due to cheaper airfares as well as a mild increase in gasoline.

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What Bloomberg Economics Says

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“War-driven pressures drove headline Brazilian inflation near the ceiling of the tolerance band around the target in April, but perhaps more importantly, underlying measures didn’t offer any relief. Core inflation and underlying services, both less exposed to the oil price shock and more sensitive to high rates, ran at an annualized pace above 5%. That won’t prompt the central bank to hold rates, but does warrant a cautious approach to unwinding its tight monetary policy.”

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— Adriana Dupita, Brazil economist

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— Click here for full report

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The annual inflation rate is now bumping up against the central bank’s target of 3%, plus or minus 1.5 percentage points. The deterioration in prices is likely to weigh on policymakers’ plans to lower double-digit borrow costs in the coming months.

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“If inflation pressures continue to broaden, renewed tightening later this year cannot be ruled out,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a research note.

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With Brazilians growing increasingly frustrated about the economy, Lula unveiled a program this month that allows households to renegotiate debts with discounted interest rates as consumer liabilities reach record levels.

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Such programs as well as a robust labor market have bolstered demand in the face of ultra-tight monetary policy. At the same time, weakening public accounts are helping to keep inflation expectations above target through 2029.

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—With assistance from Giovanna Serafim and Kevin Varley.

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(Updates with market impact, inflation details and analysis throughout.)

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