Slower-than-forecast Brazil inflation signals weakness

Brazil’s inflation slowed more than expected in April, providing the latest sign of weakness in Latin America’s largest economy.The IPCA index rose 0.57% from March, the national statistics institute reported on Friday. The data was below all but one of the forecasts from analysts surveyed by Bloomberg, whose median estimate was for a 0.62% increase. Annual inflation accelerated to 4.94%, above this year’s target of 4.25% and the fastest pace since 2017 due to some price shocks in 2018.Twelve-month inflation is expected to ease in coming months once the price spike caused by last year’s trucker strike no longer figures into the calculation.Subdued inflation, particularly in core readings, has allowed the central bank to hold the benchmark interest rate at a record-low 6.5% for over a year, and economists are debating whether more monetary easing is needed.Leading indicators suggest Brazil’s economy may have contracted in the first quarter, and the recovery is being hampered by political uncertainties that are delaying investment decisions.“Though lower than expected, April IPCA is not a game-changer for monetary policy. Headline inflation is still under pressure from fuel and food prices, although a lower pressure than last month. However, the various measures of core inflation are still running in the 0.3%-0.4% MoM range, which indicates inflation roughly around the centre of the target. This means that, from the inflation point of view, there is no need or room to cut rates – and remember, this is an inflation-targeting central bank,” says Adriana Dupita, Latin America Bloomberg economist.Swap rates on the contract maturing in January 2021, which indicate market expectations for monetary policy, fell 4 basis points to 6.89% as slower-than-estimated inflation support the case for future interest rate cuts.Six of the index’s nine categories showed either no inflation in March or nearly none, the statistics agency reported.Health and personal care prices rose 1.51%, driven by the annual adjustment of medications and accounting for almost one-third of the month’s inflation. Higher transportation costs associated with higher gasoline prices, plus food and beverage prices that are the largest component of the index, together accounted for more than half of the month’s inflation.