Brazil's inflation rate is not entirely trustworthy

27 Nov 2012 by Jim Fickett.

Brazil's current inflation rate, 5.5%, would be higher in the absence of government price controls.

Brazil's primary official inflation rate, the IPCA, has been fairly steady over the last few months, running at a bit over 5%:

Although the economy has grown by about 50% in the last 15 years or so, it still seems a bit odd for the money supply to have risen more than twice as fast as prices in most of the last ten years (note the different scales in the graph above). And, indeed, the government has begun to rely on price controls to keep inflation under control.

Last year Forbes reported:

The Minister of Energy, Edison Lobão, said gasoline prices will decline by as much as 10% to as little as 6% in the days ahead. …

The price reduction will start at 7,000 of the Petrobras (PBR) owned gas station BR Distribuidora. Other companies like Cosan’s (CZZ) Esso gasoline stations will have to follow suit in order to compete with Petrobras. Petrobras is majority owned by the federal government and immediately agreed to the price decline.

Price corrections could last months. The Energy Ministry was not available to comment on the length of the forced price reduction after market hours Wednesday. Lobao told official news agency, Agencia Brasil, that the price reduction will remain in place until “they establish themselves at a reasonable level.” …

Petrobras last adjusted prices in mid-2009, when it cut gasoline prices 4.5% and diesel prices 15% because of the global economic slowdown. …

Lobão said that higher gasoline prices were making it difficult for the government to control runaway inflation. Twelve month rolling inflation is around 6.3%.

More recently, a row between the government and electricity producers has arisen, as the government attempts to force electricity costs down. This was first announced as a tax cut, but in fact producers are being asked to absorb the losses:

President Dilma Rousseff in September asked power companies to slash their rates by an average 20 percent or risk the loss of their operating licenses, or concessions, when they expire in coming years.

The companies have the right not to renew their concessions right now, keeping their current energy tariffs. In that case, Mantega said, the government will “somehow” make sure energy prices will fall next year. He said the Treasury could be involved in such an action, but provided no specifics. …

Lower energy prices are crucial to ensure inflation remains in check next year, making room for the central bank to keep its benchmark interest rate at an all-time low for longer.

(For background and sources see Brazil inflation.)