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The consumer price indices dropped in all major cities across Brazil in the first week of February. Brazil suffered high inflation through the second half of last century and into the early 90s, leading it to establish a monetary policy that aims to maintain inflation within a specified range. Inflation is negative since consumers and business lose purchasing power as the currency depreciates. When inflation increases, the Brazilian Central Bank raises interest rates to slow down the rate of growth in the economy and avoid further inflation and the stock market drops in response to the diminished growth expectations.
Brazil is probably the country with the most closely tracked inflation indices, mainly because of the long history of hyperinflation as well as the emergence of privately sponsored indices to verify those produced by the government. The IPC-S is a weekly inflation index focused on consumer prices which allows investors to monitor inflation week by week to anticipate trends ahead of the monetary committee meetings. The next meeting is now less than a month away and inflation concerns are increasing.
The graph above shows the change in yearly inflation across Brazil’s seven major cities. Inflation was lower across the board, with the exception of Porto Alegre which was flat. This is a very positive change in trend given the increasing trend observed throughout January. If this trend persists in February, it is more likely that interest rates will be unchanged at the next monetary committee meeting in early March.
Investors in Brazil focused ETFs (e.g. EWZ, EWZS, BRF, DBBR) or the main emerging markets ETFs (e.g. EEM, VWO) which have Brazil exposures above 25%, will benefit from unchanged interest rates in Brazil. For now it is unlikely that rates will be reduced given the elevated inflation levels.
© 2013 Market Realist, Inc.