UPDATE 1-Inflation in Brazil turns positive in July; the annual rate slows down

 (Adds details from report, context, market reaction)
    By Bruno Federowski
    SAO PAULO, Aug 9 (Reuters) - Brazilian consumer prices rose
in July on higher power costs and a fuel tax hike following
deflation in June, even as the annual rate fell to its lowest in
18 years, data showed on Wednesday. 
    Prices as measured by the benchmark IPCA index rose 0.24
percent last month, turning positive after a 0.23 percent drop
the month before, government statistics agency IBGE said.
    In the 12 months through July, inflation came in at 2.71
percent, the slowest since February 1999.
    The figures came in slightly above the monthly rate of 0.19
percent and annual rate of 2.66 percent predicted by economists,
according to the median of 25 forecasts.
    Scarcer rains weighed down on hydropower last month and
drove regulators to increase electricity rates, adding 0.20
percentage point to monthly inflation. A mid-July increase in
the PIS/Cofins social contribution tax on fuels also weighed on
the index.             
    Pressure stemming from both factors should drag on through
August, economists said, but that will do little to keep the
central bank from continuing to cut interest rates aggressively.
    Inflation has slowed sharply from double digits in early
2016 in the wake of Brazil's deepest recession in decades and a
strong agricultural harvest.
    That trend seemed intact in July as food prices slid for a
third straight month. The so-called diffusion index, which
measures whether price pressure was widespread, fell to the
lowest since at least 1999, according to calculations by
consultancy firm MCM Consultores.
    The official IPCA inflation rate now rests firmly below the
bottom end of the government's target range of 4.5 percent plus
or minus 1.5 percentage points, allowing the central bank to cut
the benchmark Selic rate to a four-year low.
    The slump in inflation also drove policymakers to lower
their 2019 annual inflation target for the first time in more
than a decade in June, hoping the current period of slow price
hikes continues.             
    Yields paid on interest rate future contracts           rose
slightly in early Wednesday trading after the
higher-than-expected IPCA figures but indicated traders still
firmly bet on a fresh rate cut at the central bank's September
    For detailed results, see:             

 (Reporting by Bruno Federowski; Editing by Bill Trott)

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