(Bloomberg) -- Brazil’s annual inflation picked up more than expected in May, snapping a seven-month streak of cooling prices and adding pressure on policymakers to hold interest rates steady at next week’s meeting.

Official data released Tuesday showed prices increased 3.93% in May from a year earlier, above the 3.88% median estimate from analysts in a Bloomberg survey. Inflation stood at 0.46% on the month. 

The central bank is widely expected to pause its monetary easing campaign next week, leaving the benchmark interest rate at 10.5%, to regain the initiative in its fight against simmering prices. Policy clashes among bank leadership have also fanned concern that Brazil is becoming more tolerant to inflation under President Luiz Inacio Lula da Silva.

What Bloomberg Economics Says

“The breakdown of May CPI data shows underlying Brazilian inflation is still relatively tame. Price gains in services are higher than the central bank would prefer, but they’re not rising at the margin despite a tight labor market. We think the BCB will instead focus on the increase in inflation expectations, driven by currency weakness and fiscal concerns. That raises the odds of a rate pause at the June 19 policy meeting.”

— Adriana Dupita, Brazil and Argentina economist

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Food and beverages climbed 0.62% and housing costs rose 0.67%, representing the the main drivers of May’s price gains. Meanwhile, household goods fell 0.53%, the statistics agency said.

Economists noted that May’s inflation up-tick was partially the result of severe floods that hit the state of Rio Grande do Sul, a farming powerhouse in the south of Brazil.  

Monthly core inflation, which strips out volatile items, ticked up to 0.39% in May from 0.27% in April, according to an average of Bloomberg Economics calculations using methodologies from Brazil’s central bank.

“There are many uncertainties piling up,” for the central bank, said Alexandre Maluf, an economist at XP Inc. “Today’s inflation data brought with it a message that’s marginally worse in its composition.”

Forecasts for consumer-price increases have been rising in recent weeks, pushed up indications that the government may try to avert an economic slowdown through more fiscal stimulus.

That’s putting to test policymakers’ resolve and could end up keeping borrowing costs higher for longer. Doing so would be likely to draw the ire of Lula, who has accused central bank chief Roberto Campos Neto of causing too much economic pain in trying to hit the 3% inflation goal.

A split decision during the bank’s last interest rate-setting meeting exposed a divide between hawks and Lula appointees who favor looser policy that bolsters growth. 

The central bank has lowered the Selic by 3.25 percentage points since it began its easing campaign last August. 

--With assistance from Giovanna Serafim and Barbara Nascimento.

(Recasts lede, adds analysis and inflation details throughout.)

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