World Economy

Brazil Inflation at 11-Year High

Brazil Inflation at 11-Year HighBrazil Inflation at 11-Year High

Economic activity in Brazil fell sharply in April from March, worse than already negative market estimates and showing still more evidence the once-booming economy is heading toward a recession.

The Brazilian central bank’s IBC-Br economic activity index, a gauge of farming, industry and services activity, fell 0.84%, more than double market expectations for a drop of 0.4%, according to a Reuters poll.

High inflation and dwindling confidence have dragged down consumption, until recently the main engine of growth in Latin America’s largest economy.

“This is another data point confirming the weakness of growth in Brazil and supports our expectation for a 0.7% quarter versus quarter contraction in real GDP during the second quarter,” Barclays’ economist Bruno Rovai said in a note to clients.

Rovai said the drop in the index has totaled 2.2% so far this year.

 Inflation at 11-Year High

A shrinking economy and inflation running at a more than 11-year high have raised popular discontent with President Dilma Rousseff, who has adopted more orthodox policies to regain the confidence of investors.

Most economists expect activity to continue to falter as the central bank is poised to further raise interest rates to battle inflation while the government cuts spending to put its fiscal accounts back in order.

The Brazilian economy is expected to contract 1.35% this year, according to a central bank poll of economists released on Monday, its deepest recession in 25 years.

Brazil’s inflation rose more than expected in the month to mid-June, defying the central bank’s efforts to keep price expectations under control with successive interest rate increases.

Consumer prices as measured by the IPCA-15 index rose 0.99% in the month to mid-June, up from 0.60 in the previous month, statistics agency IBGE said on Friday. The index had been expected to rise 0.85%, according to the median forecast in a Reuters poll.

The annual inflation rate spiked to 8.80% from 8.24% in mid-May, nearly twice as much as the official target of 4.5% and at the highest since December 2003.

The inflation spike has sent consumer confidence to record lows and eroded the popularity of Rousseff, who has pledged to do “the possible and the impossible” to rein in prices.

Yields on interest rate futures, which rose in early trading in Sao Paulo, showed the central bank is expected to raise its benchmark Selic interest rate in July and possibly in September to at least 14%, the highest among the world’s 10 largest economies.

Electricity rates and fuels taxes have also risen sharply since the beginning of the year. An unusual mid-year increase in food prices boosted inflation as well. Prices for onions, tomatoes and carrots shot up, especially in the northeastern city of Recife, due to irregular rains.