Brazil’s inflation continues to increase, rates hike more likely

Brazil IGP-10 Feb 13Enlarge GraphBrazil’s general index price showed continuation of the uptrend, increasing the likelihood of an increase in interest rates next March. The IGP-10 Index, published by the Brazilian Institute of Economy (IBRE)1 is part of the IGP (General Price Index) family of indices which include both the IGP-M and IGP-DI. The data is continuously gathered throughout the month and an index is released every 10 days with the data for the previous 30 days.

The IGP-10 is the first one to publish data for the month and it is based on data from collected during the 30 days leading up to the 10th of the month. The IGP-M and IGP-DI are the following two iterations, so that each index is useful in foreseeing the outcome of the next one. The IGP-M (“M” for market”) is widely used in the market for adjusting rents, contracts, financial instruments and public prices (e.g. utilities) while the IGP-DI is used for Brazilian states debt and fixing telephone tariffs.

The graph above shows how the IGP posted a yearly inflation number of 8.06% for February, up from the previous 7.79%. The IGP-DI already crossed the 8% threshold since December and given the current data it is likely that the IGP-M will post a value above 8% later in this month. The next rates meeting is coming up on March 5 and Brazil has been fighting a high inflation rate combined with sluggish growth. The government has therefore been hesitant to increase interest rates at the previous two monetary policy meetings to curve inflation given it would hurt the meager growth, though by next meeting inflation will likely be a full percentage point higher.

Investors in Brazilian ETFs such as EWZ, or the small cap versions EWZS and BRF, should be aware that a rates hike in March would hurt the stock market and lower returns. Additionally, waiting until right before the meeting to make a decision may not be the right approach since the market may start factoring in the rates hike ahead of time. Watching the IGP indicators every 10 days is a great way of gauging where inflation may go and take early action. As of now, the data is negative for the aforementioned ETFs as well as EEM and VWO, which have exposures of approximately 25% to Brazil.

  1. Part of the Fundação Getulio Vargas, a prominent business and economics university in São Paulo.