Brazil's inflation rate increased in August due to a rise in power bills. However, economists believe that this should not deter the country's central bank from continuing its plan to cut interest rates.

According to the Brazilian Institute of Geography and Statistics (IBGE), consumer prices rose by 0.23% from July and 4.61% from the previous year. In July, prices had increased by 0.12% month-on-month and 3.99% year-on-year.

Despite falling short of market expectations, the slight increase in inflation is seen as a positive sign, as certain segments of the inflation calculation had smaller-than-expected increases. Banco Bmg Chief Economist Flavio Serrano explains that this suggests a favorable inflation situation. However, he also warns that food and service prices could start to rise again in the coming months.

Serrano believes that, despite the expected acceleration of inflation throughout the rest of the year, the central bank should continue its cycle of interest rate cuts into next year. The bank had raised its benchmark lending rate, known as the Selic, to 13.75% in August 2022 after a series of hikes aimed at curbing inflation.

Last month, the bank reduced the key rate by half a percentage point, bringing it down to 13.25%. It also expressed its intention to maintain a similar pace of rate cuts in the coming months.

"This slight worsening of inflation does not mean that the central bank will halt its rate-cutting efforts," Serrano states. "The overall inflation outlook is positive, indicating a continuation of the rate-cutting cycle."

The main driver behind the August inflation increase was housing prices, particularly electricity costs. In 2022, the Itaipu power station, located on the Paraná river between Brazil and Paraguay, generated a profit. Brazilian consumers received a one-time discount on their electricity bills in July, but in August, power bills rose once again.

Housing prices, which include electricity bills, saw a 1.11% increase in August after a 1.01% decline in July. Residential power prices rose by 4.59% in August, influenced by rate hikes in some Brazilian cities.

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