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The Inflation Situation: Brazil

Brazil’s pandemic story has been rather unusual. The nation’s president, Jair Bolsanaro, treated the pandemic as if it did not exist. Since then, the nation has been suffering from a significant, sustained economic downturn. Nevertheless, their inflation rate has been high – 8.73% in August, but down significantly from its 12.3% peak in April – partially due to elevated oil and commodity prices. If inflation continues to cool off, it may allow the Banco Central do Brasil (BCB) to ease its monetary tightening. High inflation has been part of Brazil’s economic history, even before the COVID era.

Inflation History

Brazil’s inflation target is set by the National Monetary Policy (NMP), which sets targets based on its consumer price index. The official inflation rate is the change of the consumer price index over time, specifically in regard to transportation, healthcare, housing, food, education, and clothing. The NMP adjusts the inflation rate annually, and 2022’s target was a modest 3.5%. But for decades, Brazil has seen high inflation. The country has actually experienced hyperinflation – which is a 50% price increase per month – from 1990 to 1994. Annual inflation was not 3.5% in 1990, but almost 3,000%. When inflation is that high, people get desperate. Money loses its value so fast that it is impossible to save; customers had to rush to the supermarket as soon as they received their paychecks; otherwise, they would be able to buy less since stores changed prices up to three times per day. Its peak inflation was 6,821% in April 1990. Because of these astronomical numbers between 1990 and 1994, Brazil averaged 318% inflation from 1980 to September 2022. According to experts, the nation’s historical issues with inflation have to do with large budget deficits and public sector spending.

Recent Events

During the early days of the pandemic, inflation was not an issue. May 2020 had inflation of only 1.88%, nearly a record low. The global economy slowed, and lockdowns sent commodity prices tumbling. Since Brazil exports a lot of iron and oil, that kept inflation quite suppressed. By the end of 2021, however, inflation of 10% gripped the nation, which forced the BCB to raise interest rates. Since March 2021, the BCB has raised interest rates 12 times to keep inflation under control.

Nevertheless, rising energy and food costs are still driving inflation. According to the BCB, fuel price increases accounted for about one-half of the total inflation in the country in 2021. Since then, the Russian invasion of Ukraine has only added fuel to the inflation fire, causing energy prices to shoot up even more. By April of 2022, food and fuel accounted for 80% of inflationary pressure in Brazil. When coupled with political issues related to the upcoming presidential election, the Brazilian real has suffered. It was about 4 reals per USD before the pandemic, but that ratio is now 5:1. The good news is that after the election, analysts expect inflation to cool in coming years, getting back down to low single digits by 2025.