MacroScope

Quickening Brazil inflation tops forecasts for 8 straight months

March 11, 2013

Brazil inflation jumped above expectations in February, despite a steep cut in electricity rates. It was not the first time, though; inflation has been running higher than consensus forecasts since July, considering the market view one month before the data release:

 

 

The total gap between market consensus and the actual inflation figures amounts to 1.19 percentage point – about one quarter of the inflation rate reported. Reuters polls conducted a few days before the official numbers come out have also proved wrong since July, with a total error of 0.37 point.

Why is that? Part of the difference was due to an unexpected jump in food inflation. But another part has to do with the mix of strong demand and weak supply that has dragged down the Brazilian economy over the past two years.

After failing to predict that inflation would become a problem, puzzled economists are now expecting a rate increase this year. The key Selic rate is now expected to end this year at 8.00 percent, up from 7.25 percent currently, according to a central bank weekly survey.

“Analysts have failed to catch up with the worsening inflation trend, even as they try – as we’ve been doing – to react to previous mistakes,” said Carlos Kawall, chief economist at J. Safra bank and former Brazil Treasury secretary.

“So we think the bank needs to raise rates more intensely and for a longer period,” he wrote in a research note, calling for a 50 basis point hike in April. “The sooner, the better.”

Inflation expectations as shown by the weekly central bank poll reacted to the prospects of monetary tightening, with the outlook for price rises in the next 12 months dropping to 5.51 percent from 5.62 percent in the prior week. It remains to be seen, though, whether the analysts will get it right this time.

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