Brazil inflation ends 2023 above forecasts but within target

Brazil’s annual inflation eased less than expected though remained within the central bank’s tolerance range last year, underscoring the challenges ahead to easing monetary policy.

Official data released Thursday showed consumer prices rose 4.62 percent in December from a year earlier, above the 4.55 percent median estimate in a Bloomberg survey. Monthly inflation accelerated to 0.56 percent.

The central bank targets inflation at three percent this year and 3.25 percent in 2023, with a tolerance range of plus or minus 1.5 percentage points. When price increases exceed those goals, the head of the bank is required by law to write a public letter explaining why it missed the target.

Governor Roberto Campos Neto has missed inflation goals since 2021, when the pandemic disrupted global supply-chains and sent energy and food prices soaring. After leading one of the world’s most aggressive tightening campaigns that took borrowing costs to six-year highs, the bank’s board began relaxing monetary policy last August. It has lowered the benchmark Selic rate by two percentage points to 11.75 percent and signalled two more half-point cuts through March.

Brazil’s inflation has now slowed for a third straight month, likely encouraging the central bank to stay on its current monetary loosening path. Still, analysts cautioned that deeper cuts to borrowing costs remain unlikely as expectations for consumer price increases stand above this year’s goal.

“We think that the Selic rate will be lowered by less than most anticipate over the course of 2024,” William Jackson, chief emerging markets economist at Capital Economics, wrote in a note.

Annual inflation eased from its over-12 percent peak in mid-2022. Closely watched core measures that strip out volatile items like food and energy are edging closer to the central bank’s target. Still, prices of services that are sensitive to monetary policy are cooling off more slowly.

All of the nine groups of goods and services surveyed by the statistics agency became more expensive in December. A 1.11 percent jump in the cost of food and beverages and a 0.48 percent increase in transportation were the main drivers of inflation.

In recent months, spiking airfares have caused concern among the administration of President Luiz Inaaaaaaa2cio Lula da Silva, who returned to power promising to improve Brazilians’ living standards. The government is considering multiple solutions to try to lower costs, including offering discounted tickets to students and retirees.

Daniel Karp, an economist at Banco Santander SA, sees some relief on the horizon for Brazilian households.

“Despite the upward surprise, we believe the broad view of inflation remains quite benign,” he wrote in a note. “The recent upward surprises were mostly driven by volatile items.”

Taming inflation is proving challenging all over Latin America. After months of receding price pressures, inflation in Mexico accelerated with higher consumer spending, which may push back the timing of rate cuts. Central bankers in Colombia and Peru are bracing for soaring food prices due to El Nino weather conditions. On the other hand, annual inflation in Chile posted its biggest monthly drop in more than a decade, supporting bets for an acceleration of the easing cycle.

Policymakers in Brazil are forging ahead with gradual rate cuts, as they see risks of persistent price pressures. Lula’s government is still debating budget goals, with analysts bracing for higher public spending amid an economic deceleration.