Inflation concerns resurface in Brazil

Inflation has started to accelerate once again in Brazil, casting doubt over signals from the central bank that the hike in interest rates earlier this month could be the last in the current tightening cycle. Inflation rose to 6.2% y/y in March – taking it to within a whisker of the upper bound of the central bank’s target range – and data to mid-April suggest it is likely to remain elevated this month. Worryingly, much of the recent rise seems to have been driven by a pick-up in core inflation. This in turn seems to be a consequence of mismatches in Brazil’s growth model – after a decade of strong consumption and weak investment, Brazil’s economy has hit supply constraints, resulting in a build-up of price pressures. The structural nature of Brazil’s inflation problem means that, without economic reform, it is likely to persist. This could yet warrant additional hikes in interest rates this year. And with rising inflation now starting to eat into support for the government, it will also put pressure on President Rousseff in the run-up to October’s elections.