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Brazil posed for healthy growth as producer prices stabilize

Brazil IPPEnlarge GraphThe producer price index is a measure of inflation at the producer level. As long as market conditions in the retail market allow it, an increase in producer costs may, to some degree, be passed down the supply chain all the way to the consumer. For this reason, the PPI serves as a leading inflation indicator for the consumer price index (CPI), the main inflation metric in an economy. The CPI is derived from the price paid by consumers for a basket of products, while the PPI is derived from the price received by producers for the same basket of products.

Several countries have inflation-targeting monetary policies and set interest rate targets based on inflation ranges; common practices include increasing rates to curb inflation or decreasing rates to promote economic growth and possibly causing inflation. Given the broad effect interest rates have on the economy and markets as a whole, investors are keen on predicting future monetary policy by analyzing inflation trends.

The Brazilian Institute for Statistics and Geography Institute, IBGE, publishes a monthly producer price index, the IPP, as well as a bi-weekly consumer price index, the IPCA. The IPP index as of November 2012 is shown above. The data shows that the steep inflation increase observed earlier in the year has slowed down and may stabilize between  6% and 7%. This implies that an increase in interest rates to curve inflation may not be  necessary. The reference interest rate in Brazil, the Selic, was lowered to 7.25% from 7.50% in early October 2012.

Brazilian inflation, as measured by the IPCA has been range-bound at 5.0-5.5% since July, showing that inflation has been kept under control.  The stabilization of the IPP may support further stability of inflation along with the lower Selic rate, posing the Brazilian economy for healthy economic growth in the short term.

Investors in Brazilian securities, such as iShares MSCI Brazil ETFs (EWZ, EWZS) or Market Vectors Brazil Small-Cap ETF (BRAF), as well as the Brazil heavy Latam ETFs such as iShares Latin America 40 Index Fund (ILF) or SPDR S&P Emerging Latin America ETF (GML), should acknowledge the favorable conditions for their investments.  The cautious investor will continue to monitor the IPP to avoid getting surprised by inflation that may depreciate the Brazilian Real and hurt the US Dollar denominated returns of these ETFs.

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