MercoPress. South Atlantic News Agency

Deflation in Brazil

Cost of living in Brazil was negative for the first time in four and a half years.
According to the Brazilian Geography and Statistics Institute, IBGE, consumer prices in Brazil last June dropped 0,15% after having increased 0,61% in May.

Deflation raised hopes that the basic interest rate, currently at 26%, could be reduced when the Central Bank Monetary Policy Committee meets next July 22/23.

The drop surprised market analysts who said "deflation was greater than expected. Deflation at retail level Brazil is very rare, but it's the result of the tight monetary policy of the Central Bank".

The IBGE release indicates that the drop in fuel and food prices helped deflation plus the appreciation of the Brazilian currency that now stands in the range of 2,80 reales to the US dollar after having reached 3,80 eight months ago.

Gasoline prices actually dropped 4,94% and food 0,34%. However in the first six months of 2003 inflation reached 6,64% well above the 2,94% of the same period a year ago. In the last twelve months to June, inflation reached 16,57%.

Current interest rates in Brazil are amongst the highest in the world but the Lula da Silva administration has doggedly insisted the "hard medicine" is needed to cool prices even when the economy is almost flat.

President Lula da Silva and his Finance Minister Antonio Palocci have come under serious criticism for supporting such a tight monetary policy that threatens to force the economy into recession.

However Sao Paulo market analysts believe there's margin for optimism since Mr. Palocci during a recent congressional hearing anticipated that the basic interest rate or Selic, as it's known in Brazil could drop just below 20% by the end of the year.

IBGE statistics also indicate that retail sales last May dropped 6,13% compared to a year ago, the sixth consecutive month. Of the 27 Brazilian states in only two retail sales actually expanded while in the rest of the country they dropped, particularly in the most populated and strongest, Rio do Janeiro (minus 13,68%), Sao Paulo (minus 5,37%); Minas Gerais (minus 3,69%), Bahía (minus 6,62%) and Pernambuco (minus 13,71%). These five states represent almost 80% of Brazil's retail sales.