Brazil's inflation rate accelerated in mid-January back to within the official targeted range for the first time in six months, supporting expectations of a final interest rate cut next month. Consumer prices tracked by the benchmark IPCA index rose 3.02 percent in the 12 months through mid-January, state statistics agency IBGE said on Tuesday.
The reading undershot the median 3.07 percent estimate of economists in a Reuters survey, largely due to lower power rates as heavier-than-expected rains boosted hydropower generation. Still, a strong rise in food prices suggested that a months-long period of food deflation would not stretch into 2018.
Higher food prices accounted for nearly half of the 0.39 percent monthly increase in the IPCA index, IBGE said. Economists expected a 0.44 percent rise. For the first time ever, inflation ended 2017 below the bottom end of the central bank's target range, which is 4.5 percent plus or minus 1.5 percentage points, as a record harvest pushed down food prices.
The January upswing in food inflation should bolster expectations that inflation will edge back toward the mid-point of the official target in coming months. But the resurgence of inflation is likely to be gradual amid double-digit unemployment rates and ample idle capacity in much of the economy. A central bank survey of economists put the 2018 inflation rate at 4.25 percent, below the middle of the target.
That should keep the bank on track to cut its benchmark Selic interest rate by a final 25 basis points in February to an all-time low of 6.75 percent. The bank has cut rates by 725 basis points since October. Interest rate futures indicate investors expect a 25 basis-point reduction in February, with a minority of traders banking on an additional cut in March.