May Inflation In Brazil Hits Highest Point In 20 Years

According to data released on Friday by the Brazilian Institute of Geography and Statistics (IBGE), the IPCA-15 consumer prince index in Brazil rose 0.86 percent in the first half of May, marking the highest May inflation rate in 20 years. Analysts were anticipating a 0.75 to 0.77 percent surge for the month, as per Reuters and Bloomberg data, respectively.

Over the past 12 months, inflation reached 9.62 percent, driven by higher food, and health and personal care items prices (which rose by 1.03 percent and 2.54 percent, respectively). However, the run-up was somewhat offset by lower ethanol prices and airfares, the IBGE assured.

The 12-month rate also implies a month-over-month acceleration in inflation; the 12 months comprised between May 2015 and April 2016 had seen a 9.34 percent spike in consumer prices.

The high inflation led many analysts to lower their expectations of an interest rate reduction (aimed at stimulating credit) in the upcoming months, especially as the deceleration outlook is not especially promising. As per the country’s Central Bank’s data, economists expect inflation to slow down to 7 percent toward the end of the year – versus the Bank’s target of 4.5 percent ±2, and to 5.5 percent in 2017. This would mean that the standard interest rate would fall from 14.25 percent to 13 percent.

“The new governor is more likely to demonstrate his inflation fighting credentials and leave interest rates unchanged for longer,” Capital Economics’ Edward Glossop expounded.

Shares of the iShares MSCI Brazil Index (ETF) EWZ, Market Vectors Brazil Small Cap ETF BRF and Petroleo Brasileiro SA Petrobras (ADR) PBR PBR traded up on Friday. The Brazilian Real gained 0.125 percent versus the U.S. Dollar. 

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.