March inflation is lower than expected but remains widespread

Brazil’s benchmark consumer price index IPCA rose by 0.71 percent in March per official data — below the 0.84 percent February rate, which was the sharpest price surge in 10 months, and under the median forecast of 0.77 percent measured by Reuters.

In 12 months, prices have risen by 4.65 percent.

As flagged by IPCA-15, the mid-month inflation reading, all segments except housing saw prices increasing last month. The partial resumption on March 1 of federal taxes on gasoline and ethanol took its toll on March inflation, with transportation-related prices rising 2.11 percent. Health and personal care costs rose 0.82 percent, mainly impacted by the 1.20 percent increase in health plans. 

Gasoline, which rose 8.33 percent, was the sub-item with the greatest individual impact on the March inflation index and weighed heavily on the overall rise in the transport segment. Ethanol prices also rose by 3.20 percent. 

Price rises were felt across all regions. The most significant variation was in Porto Alegre (1.25 percent), in the south of Brazil, while the smallest variation was recorded in Fortaleza (0.35 percent), in the Northeast.

While numbers came in below analysts’ expectations, this Tuesday’s inflation report puts paid to hopes of monetary policy easing in the near-term. It also raises the bar for the government to find ways of cutting spending and increasing revenue. 

Twelve-month inflation to March stood at 4.57 percent, below 5.60 percent in February and the lowest in more than two years. However, accumulated inflation in 2023 so far stands at 2.08 percent, which means that the 3.25 percent annual inflation target is unlikely to be met, even within the 1.5 percentage-point margin. 

Gustavo Sung, chief economist at Suno Research, sees some positive trends in the March inflation numbers. Costs for services, which are closely monitored by markets as an important barometer for the economy (the sector accounts for close to 70 percent of GDP), have slowed down since February — from 7.84 to 7.63 percent in 12 months.

Still, labor indicators suggest that the inflationary curve may tick back up in the near future. In February, the Brazilian economy added almost a quarter-million new jobs — a result that obliterated expectations. Celso Peirera, chief investment officer at brokerage Nomad, says the current growing payroll market hampers efforts to control inflation, as the employed population has a greater propensity to spend, thus heating up the economy.

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