MercoPress. South Atlantic News Agency

Price Index new weightings should help Brazil with inflation target and rate cuts

Eulina Nunes coordinator of the IPCA index helping to combat inflation

Brazil’s statistics agency released Monday new weightings for items in its benchmark IPCA price index, adapted to changing family consumption patterns, which should help policymakers fine-tune complying with targets and keep cutting interest rates.

“The weights published Monday are not final and may be adjusted”, said Eulina Nunes, coordinator of the IPCA index at the Rio de Janeiro-based statistics agency, IBGE.

“The agency reviews the weight of items in its basket every five years to better reflect family consumption patterns detected by its surveys” said Ms Nunes adding that “the weighting of cable TV and consumer electronic goods will increase in the consumer-price basket, while that of cigarettes will decline”.

Following the new weightings, Espirito Santo Investment Bank may trim its 2012 inflation forecast by 30 basis points to 5.6%, chief economist Jankiel Santos said from Sao Paulo.

“The change in methodology is justifiable, legitimate and is part of the game,” Santos said. “Brazil isn’t manipulating the inflation figures”.

Yields on interest rates futures show investors expect the Brazilian central bank to cut the overnight rate for a third straight time by a half-point to 11% this week.

While the re-weighting of the IPCA index will help policy makers bring inflation closer to their 4.5% target for 2012, analysts don’t expect any speeding up of central bank President Alexandre Tombini’s policy of “moderate” interest rate cuts.

Even when the changes in the IPCA index are descried as “legitimate” because they are based on a survey that shows adjustments in consumers’ spending patterns, it is also true it takes weight from items that had bigger price increases.

Analysts were initially expecting the update to the consumer price-basket to trim inflation by as much as 0.2 percentage point, Deputy Finance Minister Nelson Barbosa said Nov. 22.

“Since people typically begin to switch out of the products with the most inflation and use other products, the goods that saw a bigger price increase are reduced in the index,” Barbosa said on Monday. “That’s why it typically causes a reduction in inflation”.

Third-quarter Brazilian business confidence fell to its lowest level since the start of 2009.

The Brazilian central bank has cut interest rates as the Euro debt crisis threatens to cripple global growth. Economists this week cut their forecast for Brazilian expansion this year to 3.1%, from the previous week’s forecast of 3.16%, according to the median estimate in a Nov. 25 central bank survey of about 100 economists. At the end of August, analysts were predicting growth of 3.79%.