President Rousseff's New Economic Team Begins with Record Inflation

12/15/2014 - 08h45

President Dilma Rousseff's new economic team risks facing, from the first day of her second administration, the highest monthly inflation in 12 years.

Forecasts of an inflation rate above 1% in January 2015 have become more common.

The situation will have to be faced by Finance Minister Joaquim Levy and Nelson Barbosa, the minister of Planning, as well as Alexandre Tombini, who will continue as head of the Brazilian Central Bank.

The last time that the IPCA - the official inflation index - was above 1% was in March 2003.

This time, despite the current stagnation of the economy, prices will be pressured by the rise in electric bills, the expensive dollar, and possibly, public transportation tariffs and taxes on fuel.

Andrei Spacov, an economist at Gavea Investimentos, believes inflation in December will reach 0.8%, closing the year at 6.4%, 0.1% below the legal ceiling.

He also believes that it will reach 1.05% in January, totaling 6.9% in 12 months.

Then it would reach 0.85% in February and would surpass the annual ceiling of 7%, which hasn't occurred since 2005.

Spacov's calculations don't include the potential increase in the Cide, a tax on gasoline and other fuels, which is one of the sources that could be used to increase the government's revenue. If that occurs, the IPCA in January could reach 1.2%.

Sergio Vale, of MB Associados, forecasts very similar figures for January's rate: 1.06%.

He believes that another factor that will add to the pressure on prices is the increase in the price of beans and the impact of the weather on food.

In the government, experts already expect higher inflation at the beginning of 2015 - and nothing will be done to contain inflation, as occurred during the first Rousseff administration.

That is why there are orders to implement increases in electrical bills due to the use of thermoelectric energy, which is more expensive - the hike had been postponed this year precisely to hold back inflation.

The new orders reject price restrictions, trying to recover the credibility of economic policy.

In the decree that justified the increase in the benchmark interest rate from 11.25% to 11.75% a year, the Brazilian Central Bank anticipated that inflation will accelerate in the coming months due to a currency depreciation, which makes imported products more expensive, and the increase in public tariffs and other prices monitored by the government.

That means that there is little left to be done for the IPCA in 2015 aside from not exceeding this year's 6.5% ceiling.

That is why expectations for economic growth in the next year are close to zero. It will be necessary to increase interest rates and cut public expenses to reduce consumption and price increases.

Translated by THOMAS MUELLO

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	Ueslei Marcelino/Reuters
	Brazil's incoming finance minister, Joaquim Levy, announces last month the new economic team, in Brasilia