Brazil ‘regulating’ fuel, energy prices to stem inflation

Anadolu Agency

SÃO PAULO – The Brazilian government has been “regulating” fuel and energy rates to stave off higher inflation, President Dilma Rousseff’s Chief of Staff told the Folha de S.Paulo newspaper on Wednesday.

In his first major interview since taking up the ministerial position, Aloizio Mercadante denied Brazil was “controlling prices,” but admitted the country had mechanisms for delaying price rises in certain areas to minimise the impact on inflation.

“You regulate [price increases] in the best strategic interests of the economy, of consumers; these need not and should not be passed immediately onto consumers,” Mercadante said.

“The model allows you [to] guarantee that the impact is diluted over time and you keep within your inflation target promises.”

The government is conscious that rising prices could hamper re-election efforts by Rousseff in this October’s general election, and Mercadante was evasive when asked whether price increases were being delayed until 2015, after the elections.

Prices are currently rising by around 6.3% annualised, analysts suggest, and have edged closer to the upper limit on the government’s target of 4.5%, which has a tolerance band of 2% either way.

Inflation battlefield

The topic of inflation has been one of the key conflict zones between Rousseff and her rival presidential hopefuls, with a significant portion of the electorate old enough to remember Brazil’s hyperinflation woes of the 1980s and 1990s.

Eduardo Campos, pre-candidate from the Brazilian Socialist Party (PSB) who polled third in a recent survey of voting intentions, vowed he would reduce the government’s target to 3%.

But Mercadante argued such a move would double unemployment.

“Yes, we could reduce the inflation target to 3%, but it would mean increasing joblessness from 4.7% to 8.3%,” he said.

Neil Shearing, chief emerging markets economist at Capital Economics, says regulated prices increased 1.5% in 2013, as opposed to non-regulated, which rose 7.5%.

“Regulated prices are about a quarter of the overall inflation ‘basket’,” he told the Anadolu Agency.

“They are effectively price controls, and have had a big impact on Petrobras, because many operations have been loss-making or barely making a profit due to government caps on the price of gasoline.”

Petrobras is the state-run oil company and Brazil’s largest corporation.

Inflation reaching its peak?

Analysts say the state of Brazil’s balance sheet, weakened by a widening budget deficit and sagging commodities prices, means the government’s ability to maintain subsidies has diminished and will at some point become too costly.

Shearing believes rises in inflation, caused in part by a lag effect of the decline in the country’s currency, the real, over the past one to two years, are reaching their peak, and that an annual rate of around 6.3% should hold “for the foreseeable future, coming down by the end of 2014.”

Economists have warned that Brazil’s growth model is no longer performing due to an over-reliance on consumption and under-reliance on investment: resulting in an economy that has reached its capacity and prompting price pressures, irrespective of government price controls.

Finance Minister Guido Mantega said on Wednesday that Brazil’s economic recuperation was on track but described the global recovery as “painful”:

“We can say that the crisis is being overcome, but that overcoming of the crisis, to the point where we are in a new cycle of growth, is not immediate,: he said at a congressional public audience. “There’s a transitionary period, a painful one, for all countries involved.”

UPDATE: On Wednesday night Mantega came out and contradicted Mercadante, saying Brazil did not regulate such prices and that the government had inflation under control.

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