Consumer inflation in Brazil inching above 6%, rate hike likely

Brazil IGP-10 Feb 13 SubsEnlarge Graph

The consumer component of the IGP-10 index published this week spiked driven by an increase in the consumer component of the index. The IGP-10 index is part of the General Price Index (IGP) family of indices, which is composed of 3 monthly indices published 10 days apart from each other. Looking at all three indices gives a more frequent view of the trend of inflation.

The IGP is composed of three sub-indices, producer prices, consumer prices and construction prices. The producer price index (IPA) has the highest weight, accounting for 60% of the index; the consumer price index (IPC) accounts for 30%, and the construction index (INCC) the remaining 10%.

The graph above shows the change in the yearly inflation for each of the sub-indices. The sub-index that increased the most was the consumer index, which moved 0.3 percentage points to reach 5.9%. While the Brazilian Central Bank (BCB) sets interests rates based on the government sponsored IPCA inflation index, the IPC is a good proxy. The BCB aims to keep inflation below 6.5% and has successfully achieved it since 2004, though in order to do this, the interest rates need to be adjusted before inflation reaches that value. An increase in interest rates would curve inflation along with potential economic growth, therefore the stock market would respond negatively. The next monetary policy meeting is scheduled for March 5th.

Investors in Brazilian equities across the board, whether small, mid or large caps (e.g. EWZ, EWZS, BRF), would be affected, as well as other Latin America focused ETFs (e.g. GML, ILF) given their 50% exposure to Brazil and links with countries within the region.