Brazil Inflation: Management Challenged As Historic Economic Scourge Returns

Brazilians like to say that Brazil is the country of the future - and has been for a hundred years. In the last couple of years, it appeared that the future had finally arrived. The country's endowments; natural resources, size, a talented and educated populace, an innovative and aggressive agricultural sector, a dominant oil company all combined to produce impressive growth.

Recently however, Brazil's historic scourge, inflation, has reappeared. The problem is that the price rises in commodities - from which Brazil benefits in some sectors - also presents challenges in others. The primary challenge is one of management; can the new President, Dilma Roussef, and the country's technocrats balance the competing demands between its various sectors and tame inflation without killing the economic revival.

John Lyons has the story in the Wall Street Journal:


"Brazilian inflation, a growing headache for the month-old presidency of President Dilma Rousseff, continued its sharp rise amid soaring global prices for food and bustling consumer demand in the booming South American nation.

Brazil's headline inflation index rose 5.99% in January compared with the previous year. In inflation-sensitive Brazil, many economists also monitor month-to-month changes in the index, which is calculated similarly to the U.S. consumer-price index and includes volatile items like food and energy.

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.By the monthly measure, prices were 0.83% higher in January than in December—tied with November 2010 for the fastest such jump in more than five years.

Rising wages, soaring government spending and a jump in global food prices explain the rise. Brazil's annual rate is now well above the country's 4.5% target, which officials here describe as an important pillar of economic stability.

Making matters worse, central bank surveys show many Brazilians expect inflation to remain high. By contrast, Brazil's finance minister said that the jump was due to seasonal effects and would cool off later in the year. Not everyone agrees.

"The rise doesn't seem to be a one-time occurrence," says Marcelo Carvalho, an economist who follows Brazil at BNP Paribas in São Paulo. "All the measures of underlying inflation are high and many are picking up."

Still solidly in the single digits, Brazilian inflation remains tepid compared with the roaring four-digit rates that made the country a poster child for currency meltdowns as recently as the early 1990s. At the same, price rises have gained enough momentum to turn the left-leaning Ms. Rousseff's first weeks in office into a time of tricky policy dilemmas rather than a honeymoon.

.That's because economic studies show that rising inflation rates hurt the poor—Ms. Rousseff's main political constituency—more than they pinch the rich. The recent rise in Brazilian bean prices, for example, takes a bigger toll in the country's mostly poor northeast, a bastion of Rousseff supporters where food purchases are a relatively big percentage of household budgets. Bus fares went up in January, for example, making it more expensive for working class Brazilians who don't own cars to get around.

Brazil isn't alone. Rising inflation has become an issue across the globe's fast-growing emerging markets. Commodity rich Chile reported quickening inflation Tuesday.

China raised interest rates on Tuesday for the second time in six weeks to stem rising prices. Governments from India to Peru have taken similar measures in recent weeks.In Asia, Korea, Indonesia and Taiwan may let currencies strengthen, some analysts predict, in a bid to boost local purchasing power and offset some of the pinch of rising global food prices.

Rising inflation is pressuring Brazil's central bank to raise an 11.25% overnight interest that is already among the highest in the world.

That could pose a problem for Ms. Rousseff who came to office promising to lower the rate to sustain economic growth. With inflation speeding up, however, the central bank elevated the rate just days after Ms. Rousseff took office, and some economists predict it will raise rates again soon.

Even if higher rates succeed in slowing inflation, they are already creating other problems for Ms. Rousseff. High rates are attracting a flood of investment and sending the Brazilian currency soaring. That's made Brazilian exporters less profitable and made local manufacturers more vulnerable to less expensive Chinese imports.

Many economists say the fastest way for Ms. Rousseff to damp down inflation and start reducing rates is to rein in government spending, which has been galloping ahead at double-digit rates.

Finance officials are expected to announce cuts to proposed 2011 spending plan, though economists are skeptical that the government will be able to cut enough to make a difference without touching politically sensitive programs for the poor.