MercoPress. South Atlantic News Agency

Brazil inflation slows down in May; Central bank decides Wednesday on rates

Fuel costs, particularly cheaper ethanol, was decisive for May’s index

Brazilian inflation slowed to its lowest level in eight months in May as fuel costs dropped. The sharp drop in the monthly inflation reading provided relief to policymakers who have battled surging prices this year with three interest rate hikes, public spending cuts and steps such as credit curbs to take steam out of the economy.

The annual inflation rate rose in May, keeping it above the upper limit of the official target range for the second straight month.

The benchmark IPCA consumer price index rose 0.47% in May following a 0.77% increase in April, the government's statistics agency IBGE said Tuesday.

In the 12 months through May, the IPCA index rose to 6.55% from 6.51% in April.

That puts annual inflation well above the central bank's target range of 4.5%, plus or minus 2 percentage points.

Brazil’s central bank has hiked interest rates by a cumulative 125 basis points this year, including a 25-basis-point hike to 12% in April. Analysts widely expect another quarter-percentage point hike by central bank's monetary policy committee on Wednesday.

Brazil inflation is likely to keep slowing in the months ahead as weaker global demand and domestic policy steps take effect, although it is seen picking up again toward the end of the year, analysts said.

A government commitment to hike the national minimum wage by around 14% early next year is looming as a challenge to the inflation outlook since it is also tied to a wide range of social benefits such as pensions.

Ethanol, widely used in Brazil as fuel for cars, has especially cheapened as the sugar cane harvest has moved into full swing. Transport costs dropped 0.24% in May, softening largely on an 11.34% slump in ethanol prices in the month.

While the government wants lower interest rates in line with global peers -- the Selic is among the highest rates in major economies -- analysts say the high inflation rate, among other factors, makes it unlikely that will happen soon.