Brazilian Inflation, or Deflation, and The Petrobras effect.

(Ilha Bela, S.P.)

Journalist Celso Ming published an interesting report on Saturday in the Tribuna de Santos newspaper. Inflation in Brazil has dropped steadily lately as measured by official indices, the latest being the IPCA-15, which measures rates between the 15th day of each month.

The latest reading was 0.29% till December 15th, which follows a drop in November. Gasoline prices however, have been kept steady in the country by Petrobras (PBR). Last night, prices were R2.43 here in Santos, approximately USD 1 per liter, which is the same price it was when oil was USD 120 per barrel.

The good news is that the rise of the USD is not being passed to prices, with the immediate implication that interest rates will fall at the next bank meeting on Jan 21st. There is certainly significant room for rates to drop, unlike in the US. Rates are very high here for two reasons:

1. fear of internal consumption being greater than supply

2. flow-through of the higher USD into internal prices.

Regarding 1 (consumption), supply has actually increased as goods cannot be sold overseas and must find a market internally. Consumption has decreased as some jobs have been lost, and consumers are very cautious with all the talk of a global crisis. Regarding 2 (higher USD), higher prices cannot be passed on to the consumer because merchandise would simply not sell.

Therefore, it is certainty that rates will drop at the next meeting in January.

In addition, should PBR drop gas prices, inflation would be much lower, perhaps even in deflation territory.

PBR is therefore an obstacle here for inflation and for interest rates to drop.