Brazil consumer prices seen higher in Sept as drought bites: Reuters poll

8:46 am Tuesday, October 08th, 2024

By Gabriel Burin

(Reuters) – Brazil’s consumer prices are expected to have risen in September after staying little changed in August, due partly to a severe drought which has hit agricultural output, a Reuters poll showed.

Above-target inflation prompted the central bank to stop an interest rate easing cycle earlier this year and then to hike rates last month, but some policymakers worry this may be of little help as long as public spending remains elevated.

The IPCA consumer price index for September, to be released on Wednesday, is forecast to have increased 0.46% from August and 4.43% from a year earlier, according to median forecasts from 22 economists polled Oct. 2-7.

Higher energy tariffs associated with lower reservoir levels at hydroelectric plants caused by a lack of rain, as well as increased cigarette prices, were two important drivers of faster inflation last month.

On top of that, “the first effects of the drought will put pressure on some food and beverage prices, such as fruit, meat, milk and dairy products, baked goods, drinks and infusions,” said Bruno Imaizumi, an economist at LCA Consultores.

In an example of the impact on supply of one of the country’s staples, coffee production stood below initial forecasts in 2024 as adverse weather conditions affected key crop development stages.

Annual inflation has continued to run at more than one percentage point over the central bank’s goal of 3% since June, with expectations for next year pointing to at a rate close to 4% in the bank’s weekly survey among economists.

Besides the drought, Banco Central do Brasil chief Roberto Campos Neto has attributed unanchored inflation to some worrying fiscal trends, as President Luiz Inacio Lula da Silva’s government continues to pump the economy with higher spending.

Campos Neto, who ends his term this year, has also said tighter interest rates alongside looser fiscal policy create inefficiencies that hinder the transmission of monetary policy, stressing the need for more coordination.

On the other hand, Lula’s fiscal stimulus keeps boosting economic activity. Last month, the Finance Ministry raised its growth forecast for the economy to 3.2% from 2.5% for 2024, compared to an expansion of 2.9% last year.

“With activity and job markets booming, and real wages and (economic) expectations on the rise, service prices tend to remain relatively rigid and hover above 3.0%,” ABC Brasil economists wrote in a report.

(Reporting and polling by Gabriel Burin; Editing by Kim Coghill)