- The Washington Times - Thursday, February 13, 2003

RIO DE JANEIRO, Brazil, Feb. 13 (UPI) — Brazil's inflation figure for January ticked up to its highest 12-month total in six years, the government said Thursday.

The reading came as new President Luiz Inacio Lula da Silva underscored that reform is the key to economic growth.

The government reported that inflation in January was 2.25 percent, higher than what most analysts were forecasting. Inflation was 2.1 percent in the previous month.

The January number puts the 12-month inflation reading at 14.5 percent — its highest level since August 1996.

Government officials said the biggest culprit in the inflation surge was a sharp devaluation in the local currency and a jump in fuel prices — which in turn pushed the price of other goods and services higher.

Analysts say the numbers point toward another hike in the key interest rate next week when the central bank convenes its monthly policy meeting. The Selic interest rate stands at 25.5 percent — its highest level in four years.

The high interest rates — needed to dampen inflation — have the byproduct of hampering efforts by Lula to spark the economy and create jobs, analysts say.

"We're expecting a growth rate of 1.9 percent of (gross domestic product) this year, and this isn't enough to create enough jobs to reduce the unemployment rate," said Luis Lima, a senior economist with BBV Bank in Sao Paulo.

"This, in the long wrong, will bring problems to Lula's government."

The unemployment rate sits above 10 percent, though some analysts argue that number is a little high due to a change in the methodology used to calculate it.

Speaking at a ceremony marking the creation of the new Council on Economic and Social Development, Lula said that austere — and unpopular — economic moves he's made in his first month in office were needed, as he inherited an economy in a dangerous situation.

"That forces us to take tough measures that we don't like to take, but that are indispensable so that the situation doesn't get out of control," he said.

"Therefore, our reforms make economic and social sense. The social security, tax, political, labor and agrarian reforms can't be postponed and the country cannot do without them."

Analysts say that reforms to the social security and tax systems are essential if Brazil is to lessen the burden of its $240 billion debt and return to economic stability.

But the reforms are likely to face stiff resistance — not the least of which from within Lula's own Workers' Party, which for years blocked such reforms in Congress during the two terms of former President Fernando Henrique Cardoso.

Meanwhile, the government said Thursday that it was suspending payments on some $2 billion in expenses from 2002, to review that the contracts had gone through proper channels.

That news comes on top of Lula's announcement earlier this week that he was slashing $14.1 billion in spending from this year's budget in an effort to meet ramped-up fiscal targets.

It was last week that Brazil's finance minister revised the country's primary budget surplus target from 3.75 percent to 4.25 percent of GDP.

These moves have pleased economists who like to see the belt-tightening done by a government many worried would spend the country into default.

And some analysts have pointed out that despite the increase of inflation, a closer examination of the numbers spells better times ahead for Brazil.

"Current inflation is indeed high, but it reflects many seasonal one-off factors, such as the late December hike in fuel prices and the readjustment of urban bus tariffs in Sao Paulo," said Gustavo Reis, an economist with the Rio de Janeiro-based Pactual investment bank.

"That is why analysts in Brazil like to track core inflation" — a reading using more specific data — "which is on its way down at 1.3 percent in January."

Reis said he expects February will see that core inflation — and the headline reading — to be lower, and that it should continue heading down for the rest of the year.

But both Reis and Lima said that it looks all but impossible for the government to meet its inflation target for this year of 8.5 percent.

January's inflation reading "was more than 25 percent" of the year's target, Lima noted. "To reach the target, we'll have to have a monthly inflation rate that averages 0.66 percent."

The consensus is this is an impossible average to reach, with most economists forecasting inflation for this year of at least 11.5 percent.

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