By Jeffrey T. Lewis
SAO PAULO--Brazil's consumer prices jumped higher in December, boosted by energy and food prices, leaving the 12-month figure above the central bank's 4% target for 2020 and opening the door for higher interest rates later this year.
Consumer prices increased 1.35% from November, the fastest monthly pace since February 2003, the Brazilian Institute of Geography and Statistics, or IBGE, said Tuesday.
Prices rose 4.52% from a year earlier, the highest figure for the month since 2016. In November, prices rose 0.89% and increased 4.31% from a year earlier. Prices also rose 4.31% during 2019.
Brazil's inflation accelerated in the final months of 2020, after the 12-month rate hit a 21-year low in May, as emergency aid payments to the country's poorest residents during the coronavirus health crisis increased demand at home and the weak real helped boost exports of meat and other food products.
The pandemic also slammed economic growth early last year, pushing the central bank to cut its benchmark lending rate, the Selic, to a record low of 2% to help spur a recovery. With unemployment still high and the aid payments ending in December, economists expect a rebound this year, but from the low level at the end of 2020, and see the bank raising the Selic the end of 2021.
"You have two bad situations happening at the same time--the weak economy and rising inflation," said Andre Diz, an economics professor at Sao Paulo's Ibmec business school. "The central bank should raise rates, but not by much because anything that doesn't help growth will make things worse."
The central bank's target for inflation in 2020 was 4%, but with a tolerance range of 1.5 percentage points in either direction, giving the bank some leeway regarding rate increases. Brazil's National Monetary Council, a financial policy-making body including the economy minister and the president of the central bank, began trimming the central bank's inflation target in 2019, when the target was set at 4.25% after 14 years at 4.5%. The target fell to 4% for 2020 then to 3.75% for this year, with the same 1.5 percentage point tolerance range as last year.
The outlook is for price increases to slow in coming months, but inflation is still faster than expected just a few months ago, and the bank will probably start raising the Selic as early as March, according to Jason Vieira, chief economist at Infinity Asset in Sao Paulo.
"The central bank, considering the target, can take some comfort, but not as much as they thought they had last year," he said, adding he expects the Selic to reach 4% by the end of 2021.
Another concern for the bank is the government's fiscal situation. The emergency aid spending, along with other stimulus measures, pushed the national debt higher last year and sparked concerns the government might abandon efforts to rein in spending this year as well. The central bank has long pointed to fiscal measures as a point of concern, and a lack of spending control could make the bank more willing to raise rates, according to Ibmec's Mr. Diz.
"The central bank has said it wants to see how the government will act, and any actions will matter to policymakers," he said.
One factor that could help ease price pressures in coming months is the exchange rate, according to economists. The Brazilian real has lost almost a quarter of its value against the dollar over the past year, making imports more expensive. If the global economy recovers in coming months, that could help the real strengthen and reduce the price of imported goods, Mr. Diz said.
Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com
(END) Dow Jones Newswires
01-12-21 0910ET
