SAO PAULO Brazil's inflation accelerated to the fastest rate in nearly eight years in January, raising bets of an interest rate hike this year that could complicate the government's drive to reignite a near-stagnant economy.
The Brazilian currency, the real, also jumped on the news, hitting a 9-month high against the dollar after central bank president Alexandre Tombini said he was worried about inflation.
Finance Minister Guido Mantega had a more relaxed interpretation in an interview with Reuters late on Thursday, saying that the spurt in prices is not a cause for alarm and that annual inflation should start coming down in February.
A central bank source told Reuters that 12-month inflation will remain slightly above 6 percent through the first half of 2013, dangerously near the 6.5 percent ceiling of the government target, but that a more stable exchange rate will help inflation ease "a lot" in the second half of the year.
The country's benchmark IPCA consumer price index rose 0.86 percent in January, the highest monthly reading since April 2005, government data showed on Thursday.
In the 12 months through January, inflation rose to 6.15 percent, the highest reading in a year. The government targets inflation at 4.5 percent, with a tolerance margin of plus or minus 2 percentage points.
Interest rate futures rose across the board in the BM&FBovespa exchange, suggesting more bets that the central bank would raise its benchmark interest rate by around 100 basis points this year, according to traders. The rate has been cut to an all-time low of 7.25 percent to stimulate economic growth.
Low interest rates and a depreciated currency are key elements of President Dilma Rousseff's plans to boost investment and output in Brazil's manufacturing industries. Taming inflation has also been a top priority for her, but January's number shows she just can't have it all.
"The central bank will tolerate a stronger real in an effort to limit imported inflation, but this will come at the expense of a further deterioration in Brazil's external competitiveness, which will weigh on economic growth," wrote Neil Shearing, chief emerging markets economist at Capital Economics in London.
In an interview posted on O Globo website, Tombini said he is feeling uncomfortable.
"Inflation worries us in the short term. It's very resilient, but it's not out of control," Tombini told O Globo financial journalist Miriam Leitao.
Asked whether it was time for the central bank to adjust its monetary policy, Tombini said he is "paying attention to inflation.
The Brazilian real strengthened about 1.1 percent to 1.965 reais to the dollar after the publication of Tombini's remarks. A Reuters poll showed on Wednesday that analysts expected the real to remain around 2 per dollar for the next 12 months. <BRL/POLL>
Food and cigarettes were the main inflation drivers in January, though analysts noted accelerating price rises for nearly three of every four product categories. Core measures were also stronger than in the same month a year ago, suggesting the recent inflation spike is not likely to fade quickly.
"If inflation worsens in the next two or three months, that can lead to a monetary tightening later," said Carlos Kawall, chief economist at J.Safra in Sao Paulo.
Brazil is alone in its struggle against inflation among the largest market-friendly Latin American economies. Inflation has subsided elsewhere in the region, such as in Mexico and Chile, as a spike in global food prices fades.
The central bank cut interest rates 10 straight times through October 2012, saying Brazil no longer needed one of the highest borrowing costs in the world to tame inflation. With low interest rates as a top priority, the government has been trying to use other tools to fight price rises, such as tax breaks.
A government-sponsored reduction in electricity power rates prevented January inflation from reaching 1 percent, said Juan Jensen, an economist with Tendencias Consultoria in Sao Paulo.
It should also limit the monthly price rise in February, though annual inflation is expected to remain above 6 percent - and possibly even breach the target ceiling - by at least mid-year, economists said.
The government is also mulling tax cuts on food staples, Rousseff and Finance Minister Guido Mantega said recently. Such measures will probably force the government to miss a key budget target this year.
The January IPCA index had been expected to rise 0.84 percent, from an increase of 0.79 percent in December, according to the median forecast of 31 economists surveyed by Reuters.
Forecasts for the rise ranged from 0.78 to 0.90 percent.
Personal expenses rose 1.55 percent from December; the category includes cigarettes, whose prices spiked 10.11 percent. Food prices rose 1.99 percent.