Mid-month inflation index comes in above expectations

Fuel prices pushed Brazil's mid-month inflation index up. Photo: Isaac Fontana/Shutterstock

March’s IPCA-15 consumer price index, a mid-month reading that is considered a reliable predictor of official inflation, came in above market expectations. Prices rose 0.69 percent in the first half of the month. The median forecast measured by Reuters was 0.65 percent.

According to the Brazilian Institute of Geography and Statistics, all segments except housing saw price increases in March. Additionally, rises were felt in all surveyed regions. Increases in the prices of transportation and eating out have accelerated from February.

In March, the government ended federal social security tax exemptions on fuel, which had been enacted during the previous administration of Jair Bolsonaro. The move was an unsuccessful attempt by the former president to win re-election by creating feel-good factors in the economy.

The data may add to investors’ concerns, as the Central Bank announced on Wednesday that it is will not cut interest rates until inflation falls to target. The government’s target is 3.25 percent, with a tolerance of 1.5 percentage points. But markets believe the official rate will end the year at 5.95 percent.

In a more hawkish statement than expected, the Central Bank added that it “will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.”

The Central Bank’s combative communiqué raises the stakes for the government’s soon-to-be unveiled new fiscal anchor. The proposal to tame public debt will be released in April, after President Lula returns from his trip to China.

On Monday, Vice President Geraldo Alckmin said the anchor should be based on a tripod consisting of keeping the debt curve under control, ensuring primary surpluses, and controlling public spending.