By Luana Maria Benedito

SAO PAULO (Reuters) – Consumer prices came in slightly above expectations in July, driven by higher gasoline and air ticket costs, adding to monetary policy uncertainties after the central bank indicated potential interest rate hikes to control inflation.

Prices in Latin America’s largest economy increased by 0.38% last month, as reported by statistics agency IBGE on Friday, accelerating from a 0.21% increase reported in June and exceeding economists’ forecasts of a 0.35% monthly rise in a Reuters poll.

In the 12 months leading up to July, prices rose 4.50%, up from 4.23% in June and slightly above the 4.47% projected in the Reuters poll.

Annual inflation now stands at the upper limit of the tolerance band for the central bank’s target, which is 3%, plus or minus 1.5 percentage points.

“Overall, this was a poor start to the quarter due to temporary shocks,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. “But we expect these pressures to ease soon, keeping underlying inflation pressures under control over the next few months.”

The latest inflation data comes after Brazil’s central bank stated in its policy meeting minutes on Tuesday that it won’t hesitate to raise interest rates if necessary to bring inflation down to its target.

Capital Economics’ deputy chief emerging markets economist Jason Tuvey noted that the fresh consumer prices figures, driven by a pickup in underlying core services inflation, will do little to change the hawkish stance of policymakers.

“But, with the real having recovered some lost ground in recent days, we still think an interest rate hike is unlikely.”

Brazil’s currency was trading around 5.50 per dollar on Friday, recovering some losses after it weakened past 5.80 per greenback earlier this month. However, the Brazilian real has still decreased by 12% so far in 2024.

Central bank director Gabriel Galipolo stated on Thursday that the bank is monitoring how foreign exchange movements impact inflation but warned against establishing a “mechanical” relationship between them and monetary policy.

According to IBGE, the upward surprise in July inflation was mainly due to a 3.15% increase in gasoline costs, which surged after state-run oil giant Petrobras raised prices for the first time in almost a year.

Airfares also contributed to inflation growth, with a 19.39% increase in July, as noted by IBGE research manager Andre Almeida: “We have school holidays in July in Brazil, which contributed to the increase in air ticket prices.”

Conversely, food prices fell 1% after a 0.44% rise in June, marking the largest downward impact on the overall index.