Brazil Inflation Jumps Over Target Limit Before Rate Meeting

t7y[wj6sh78u4mexptkp59kq_media_dl_1.png Brazil's central bank, national

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(Bloomberg) — Brazil’s annual inflation climbed over the upper bound of the target range in May, complicating central bankers ability to deliver additional interest rate cuts when they gather next week.

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Official data released Friday showed consumer prices rose 0.58% from a month earlier, above the 0.53% median estimate of analysts surveyed by Bloomberg. From a year ago, inflation hit 4.72%, above the target of 3%, plus or minus 1.5 percentage points.

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President Luiz Inácio Lula da Silva is trying to soften the financial blow caused by the Iran war’s energy shock with a flurry of social spending as he vies for a fourth term in office. The measures are padding consumers’ budgets and helping sustain growth despite extremely tight monetary policy.

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Rising food and beverage prices, which jumped 1.33%, as well more expensive housing costs drove May’s price gains, the statistics agency said. Transportation costs fell as the government announced additional fuel subsidies.

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What Bloomberg Economics Says

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The May inflation report will concern Brazil’s central bank on two fronts. First, an above-target headline print — likely to persist in coming months — flags the BCB may soon be in breach of its goal. Second, high underlying measures indicate that pressures have spread beyond components directly affected by the Iran war. Combined, this may prompt even more monetary policy caution going forward.

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— Adriana Dupita, Brazil economist

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— Click here for full report

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In recent months, policymakers have chipped away at the benchmark Selic rate, now 14.5%. But a worsening inflation outlook has many investors doubting that the central bank’s board, known as Copom, has any room left to cut.

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“The further rise in inflation last month, coming alongside fiscal support and strong growth, sets up a tricky decision for Copom” Kimberley Sperrfechter, an emerging markets economist at Capital Economics, wrote in a research note.

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While Sperrfechter sees a pause coming at next week’s rate-decision meeting, “the key point is that the easing cycle will be stop-start over the rest of the year,” she said.

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—With assistance from Giovanna Serafim, Robert Jameson and Kevin Varley.

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(Updates to add inflation breakdown, analysis from fourth paragraph)

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