Brazil inflation in May hits multi-year high, putting upward pressure on interest rates

Outbreak of the coronavirus disease (COVID-19) in Rio de Janeiro
FILE PHOTO: People walk in a popular street market before Christmas, amid the coronavirus disease (COVID-19) outbreak, in Rio de Janeiro, Brazil, December 23, 2020. REUTERS/Pilar Olivares

June 9, 2021

By Jamie McGeever

BRASILIA (Reuters) -Brazilian inflation jumped to its highest monthly rate for May in a quarter century and the annual rate scaled 8% for the first time in nearly five years, figures showed on Wednesday, almost certainly confirming another punchy interest rate hike from the central bank next week.

The monthly and annual rates of increase in consumer prices were faster than economists had expected, and are likely to cast further doubt on policymakers’ insistence that much of the recent rise in inflation is down to temporary shocks.

The 0.8% monthly rate of inflation, driven by electricity and housing costs, was the highest for any May since 1996 and the 8.1% annual rate was the first reading above 8% since September 2016, statistics agency IBGE said.

The median forecasts in a Reuters poll of economists were for 0.7% and 7.9%, respectively.

“Overall, the sheer pace of inflation will make for uncomfortable reading at the central bank,” said William Jackson, chief emerging market economist at Capital Economics.

“Policymakers have given a clear steer that a 75bp hike in the Selic rate to 4.25% next week is on the cards. We suspect that they will signal another 75bp hike in August,” he said.

All nine categories surveyed by IBGE showed rising prices in May. Housing costs, including electricity prices, rose 1.8% and accounted for a third of the overall rise, while transport, including fuel, rose 1.2% and accounted for just under a third of the total increase, IBGE said.

Electricity prices jumped 5.4% in the month. Brazil’s worst drought in nearly a century is putting upward pressure on prices because a large part of the country’s power is hydro-generated.

The central bank’s year-end inflation goal is 3.75%, with a 1.5 percentage point margin of error on either side. May’s data shows inflation running well above even the 5.25% upper limit of that range.

Central bank chief Roberto Campos Neto said on Tuesday that policymakers are “100% committed” to meeting their inflation goals, and that they still think much of the recent rise is due to temporary shocks.

(Reporting by Jamie McGeeverEditing by Chizu Nomiyama and Angus MacSwan)