(Dec 27): Brazil’s annual inflation unexpectedly slowed in early December as energy costs dropped, giving central bankers limited relief as they pledge two more jumbo interest rate hikes by March.

Official data released on Friday showed consumer prices rose 4.71% from a year earlier, below the 4.83% median estimate in a Bloomberg survey of economists and the prior reading of 4.77%. On the month, they increased 0.34%. 

Central bankers hiked rates to 12.25% this month and signalled an extension to the tightening cycle that would lift the benchmark Selic to an eight-year high. More expensive meat has driven up food costs, services inflation is above the 3% target and a weaker real is adding pressure to industrial goods prices. 

Residential energy bills fell 5.72% on the month, according to the report. Airfare rose 4.43% — down from a 22.56% spike previously — while meat prices soared over 8% and food outside the home increased 1.23%. 

“Despite the downward surprise, this wasn’t a good reading,” said Alexandre Maluf, economist at XP Investimentos. While Black Friday discounts helped hold down some prices, food and services costs showed renewed pressure. “Short-term inflation isn’t showing any signs of relief, which should make central bankers persist in their hiking cycle.”

A separate release on Friday showed unemployment fell to 6.1% in the three months through November, the lowest level in the series that started in 2012.

Today’s readings reinforce that inflation “continues under pressure from a tight labour market”, Rafaela Vitoria, chief economist at Inter, wrote on X.

A strong labour market is underpinning consumer demand and fueling economic growth that has surprised to the upside throughout 2024. In all, policymakers have said the disinflation process has stalled.

Gabriel Galipolo, who will take over as central bank governor in January, has said there’s a “high bar” for any change to the institution’s guidance. 

Outstanding loans grew 1.2% on the month of November despite high rates, according to central bank data published on Friday. Policymakers are warning about stronger-than-expected credit flows, suggesting caution at a time where personal default rates remain at 5.4% and household debt hovers around 48%. 

Meanwhile, investors have dumped local assets as they turn more skeptical on President Luiz Inacio Lula da Silva’s pledges to rein in spending. The central bank has stepped into the currency market with spot and credit line auctions repeatedly in the last two weeks, providing liquidity as the real sinks near a record low. 

Despite that intervention, the real is still down over 21% against the dollar this year, the worst-performing major currency. A weaker exchange rate fuels inflationary pressure by making imports more expensive.

Analysts surveyed by the central bank see annual inflation accelerating to 4.91% for the full month of December and ticking down to 4.84% at the end of 2025.

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