Monday, August 6, 2012

As food prices rise, Brazil begins to face inflationary pressures while growth stagnates

Brazil continues to be on the forefront of the global inflationary wave that will be sweeping developing economies as rising food prices make their way through the system.

FGV Brazil General Prices IGP-DI YoY ( (source: Bloomberg)
GS: - Inflation, as measured by the composite IGP-DI Index, accelerated to (a higher-than-expected) 1.52% mom in July, up from 0.69% in June. The July IGP-DI print was higher than 1.46% Bloomberg consensus and our 1.40% forecast. The acceleration of inflation in July from June was driven chiefly by the acceleration of wholesale agricultural prices to a very high 5.3% from 1.0% in June.
We've gotten some e-mails on the topic basically asking: who cares? The answer is that anyone who cares about global economic growth should pay close attention to this. Brazil is the world's 6th largest economy. Inflation will reduce the central bank's ability to ease monetary policy, significantly limiting the nation's growth potential. And Brazil's growth is already slowing materially.
Reuters: - Brazil's benchmark Selic rate is already at an all-time low of 8 percent after eight cuts since August 2011 as policymakers try to jump-start a stagnant economy.

The world's sixth-largest economy will grow only 1.85 percent this year, according to the survey, less than the forecast of 1.9 percent seen one week earlier.

That would be its worst performance since a mild contraction in 2009 in the aftermath of the global credit crisis, and a far cry from the 7.5 percent boom in 2010.
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