Wages may drive the next round of Brazilian inflation

Despite a seasonal uptick in unemployment in Brazil, skilled labor remains scarce enough to force employers to pay more to compete for talent. This, in turn, may fuel new inflationary pressure despite the government’s best intentions.

The Brazilian Statistical Institute (IBGE) announced Friday that unemployment hit 5.7% for the month of February.

While the rate is the lowest on record for the month — and below economist forecasts of 5.9% — it stil represents a 0.2% climb over January, mostly due to seasonality effects unlikely to ease pressure on local labor markets.

The scarcity of qualified labor forced nominal average wages to hit an all-time high in February, fueling consumer demand.

Last year, strong domestic consumption offset weak Brazilian industrial output in the GDP figures, helping the overall economy close the year with 2.7% growth.

Consumption-led growth seems likely to remain a driving force in 2012, with January economic activity ringing in higher than expected by the market.

That has been good news for Brazilian retail, according to IBGE data. Retail sales climbed 2.6% from December to January, beating economist expectations and pushing up the Ibovespa index Friday and this morning.

But to many analysts, wage gains are a double edged sword. Increased wages have also increased costs, which have pushed down margins, or have been passed on to consumers.

This process fueled inflation in 2011, and the pattern seems to have continued at the beginning of 2012 — at a time the central bank has been cutting rates to spur growth.

Annualized inflation hit 5.5% as of last week, above the government target of 4.5% but within the 2-percentage-point tolerance range.

Inflation on the high side of the target is likely to continue in 2012, as market expectations and government estimates pin inflation above the 4.5% target for 2012 and 2013.

Brazilian government figures released Friday forecast inflation to fluctuate with economic activity for the rest of this year, dropping in April and May and climbing in June and July.

As for the retailers, given analysts’ qualms about the health of the sector, this may be a chance to trade low expectations for stocks like CBD (quote), which operates the country’s leading retail chain.

by William Brown for Emerging Money.

Leave a Reply