Brazil has 4th month of deflation

Brazil had a fourth month of deflation in June, as a surging currency cut the cost of foods and other imported goods, an index of consumer, wholesale and construction prices showed.

The Rio de Janeiro-based Getulio Vargas Foundation's IGP-M index fell 0.65 percent in the month ended August 20, its biggest decline since a 1 percent drop in June 2003, a report in the foundation's Web site said. A Bloomberg survey of 20 economists predicted a median drop of 0.59 percent in the index.

Brazil 's real has gained 23 percent in 12 months, the best performance against the dollar of the 61 currencies tracked by Bloomberg. Economists such as Vladimir Caramaschi of Fator Corretora expect the central bank to lower the benchmark interest rate next month as the stronger currency helps pare import costs that companies pass on to consumers.

``When the currency is this strong, producers just don't have any room to pass through costs to consumers,'' Caramaschi said in a phone interview from Sao Paulo. ``This deflation spree was unexpected and will surely have long-lasting effects on consumer prices.''

The deflation, which is most evident in wholesale prices, suggests the central bank succeeded in reining in prices by raising interest rates nine times between September 2004 and May. Prices fell 0.34 percent in July, 0.44 percent in June and 0.22 percent in May, the longest streak of declines in the IGP-M since at least 1989.

Crimping Demand

Higher borrowing costs also crimped consumer demand, slowing the country's fastest economic expansion in a decade and helping extend the currency's rally by luring foreign investors to the country's fixed-income market.

``The stronger currency is easing pressures on our cost structure but at the same time, it forces us to cut prices to remain competitive,'' said Adolfo Tiscoski, president of Higie Bras Industria e Commercio Ltda., a detergent and cleaning goods maker, in a phone interview from Caxias do Sul, Brazil.

Higie Bras slashed prices for detergents, soaps and other goods by an average of 10 percent since June after a drop in the cost of caustic soda, ether and other imported raw materials, he said.

A surge in international oil prices of about 40 percent since the end of April may put an end to declines in raw material costs for manufacturers, Caramaschi said. Brazil imports about 10 percent of the oil it consumes and may not be self-sufficient before the end of 2007, according to the government.

The Brazilian real fell 0.2 percent to 2.3856 to the dollar at 11:45 a.m. New York time. It has gained 11 percent this year. Crude oil for October delivery rose 4 percent to $69.80 a barrel in New York. Oil futures reached $70.80 yesterday, a record since trading began in 1983.

``Oil can create problems in the medium term, not for now fortunately,'' Caramaschi said.

Caramaschi expects the bank to lower the so-called Selic rate target to 19.25 percent next month from 19.75 percent now. That would be the first central bank rate reduction since December 2003.

``The bank will be cautious with the oil scenario, but it won't backtrack from reducing rates,'' he added.

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