Brazil closes 2021 with its highest inflation since 2015

Annual inflation in Brazil ended 2021 at a six-year high of 10.06%, government data showed on Tuesday, well above the upper limit of the central bank’s target range due to rising fuel and energy prices.

Despite the slowdown from the 12 months to November, when it hit 10.74%, the rise in the benchmark IPCA consumer price index was the largest in a calendar year since 2015, statistics service IBGE said, while exceeding slightly the median forecast of 9.97% in a Reuters poll of economists.

The index rose 0.73% in December alone, IBGE said, above the 0.65% forecast in a Reuters poll, driven mainly by clothing prices, which rose 2.06%. The final perception of 2021 is that the inflation rate exceeded both the central bank’s year-end target of 3.75% and the 5.25% limit of its tolerance range.

By law, the president of Brazil’s central bank, Roberto Campos Neto, will have to write an open letter explaining why the authorities exceeded the target’s tolerance margin. This is the sixth time this has happened since the current inflation targeting regime was created in 1999, the previous one in 2017.

Transportation was the main driver of the sharp increase in prices in Latin America’s largest economy last year, with annual increases of 21.03%, driven by the 49.02% advance in fuel prices throughout 2021.

Housing prices also contributed to the general result, with an annual rise of 13.05%, affected by an increase of 21.21% in electricity, while in food and beverages, the one that contributed the most to the rise in prices was ground coffee, with a rise of 50.24 percent. Together, the three groups accounted for about 79% of inflation in 2021, according to IBGE.

Accelerating inflation pushed Brazil’s central bank into one of the world’s most aggressive interest-rate hike cycles last year, raising the benchmark Selic rate to 9.25% in December from 2% in March.

Of the nine groups of products analyzed, all registered increases in December, with the highest increases for clothing (2.06%), residence items (1.37%) and food and beverages (0.84 percent).

Central bank officials have already indicated they will apply another 150 basis point hike in February and said the country’s tightening of monetary conditions could be extended until inflation expectations return to normal.

Analysts expect inflation and higher interest rates to weigh on the Brazilian economy in 2022, hurting household demand and discouraging corporate investment.

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