Brazil's Inflation May Slow on Lower Food Prices: Week Ahead

By Laura Price

Sept. 1 (Bloomberg) -- Brazil's inflation rate may slow for a third month in August because of declining costs for meat, fruits and vegetables.

Consumer prices as measured by the IPCA index increased 0.31 percent last month, according to the median forecast of 23 economists surveyed by Bloomberg. That would be the smallest gain since October. The report is slated for release Sept. 5.

Slowing inflation may not be enough for policy makers to pare back the fight against rising prices just yet, said Alexandre Lintz, an economist at Banco BNP Paribas Brasil SA in Sao Paulo. The central bank has raised the benchmark rate three times since April, to 13 percent from a record low of 11.25 percent, to slow inflation near the 6.5 percent upper limit of its target.

``This deceleration is very short term, due to food prices,'' Lintz said ``There's not much room for optimism. The central bank will have to be very tough to keep inflation under control.''

The annual inflation rate may ease to 6.2 percent, according to 12 economists surveyed by Bloomberg, after reaching a three-year high of 6.37 percent in July. The central bank targets inflation of 4.5 percent, plus or minus 2 percentage points. Policy makers are expected to raise the benchmark rate to 14.75 percent by year-end, according to an Aug. 22 central bank survey of about 100 economists.

Consumer Prices

Consumer prices rose by 0.53 percent in July and 0.74 percent in June.

Stabilizing prices for cattle, fruit and vegetables are leading the deceleration in inflation, Lintz said. Average cattle prices in the South American country fell to 90.36 reais ($55.44) per arroba, a Brazilian weight measure equal to 15 kilograms or 33 pounds, on Aug. 28, according to the University of Sao Paulo. The price reached a record 94.41 reais on June 23.

``When the economy starts decelerating faster, which is our expectation for the first half of 2009, the central bank will be able to start cutting rates again,'' Lintz said. ``If we get to 2009 and inflation is high, with high salaries, they won't be able to cut.''

Last week, the real fell 0.3 percent to 1.6315 per dollar. The yield on the government's zero-coupon bond due January 2010 fell 4.5 basis points, or 0.045 percentage point, to 14.74 percent, according to Banco Votorantim.

The benchmark Bovespa index fell 0.3 percent in the week to 55,680.41 points. Cia. Energetica de Sao Paulo, the utility controlled by the state of Sao Paulo, led the declines, while Duratex SA, a Brazilian maker of bathroom and wood products, led the gains.

Event Date IPC-S Weekly Consumer Prices 09/01 Monthly Trade Balance 09/01 Industrial Production 09/02 Vehicle Sales 09/04 IPCA Monthly Inflation 09/05

To contact the reporter on this story: Laura Price in Sao Paulo at lprice3@bloomberg.net