The Inflation Ratio in Brazil

Even if the inflation in Brazil always has been high, the country has never before experienced the levels reached between 1980 and 1995. For a long time, Brazil applied an expansive politics based on foreign capital, and when the capital on the world market drained in the beginning of the 1980ths, Brazil like many other countries in Latin America ended up with a too large external debt and finally started to print money.

Several efforts were made to combat the inflation but they all failed, very much due to populist politicians who failed to implement a prudent fiscal politic.

First when Fernando Henrique Cardoso where selected minister of economics could the inflation in Brazil finally be controlled. Under his leadership, the new Real Plan was introduced on July 1 year 1994, and the yearly inflation ratio has been on single digit level ever since.

Low inflation, but to a high price?
The average yearly inflation ratio the last 10 years has been somewhat lower than 8%, far from the days of hyperinflation in the 1980ths but still unacceptable with western standard. The goal of the government is now to reduce the difference from the western world, and a target to achieve around 4% in yearly inflation ratio by 2006/2007 has now been set.

A further reduction of the inflation ratio would allow lower interest rates and thereby higher growth ratio of the economy, but to further reduce the inflation ratio is a problem of structural and partly historical character.

• The common use of indices for adjustment of prices started already in the beginning of the 1960ths, as a comfortable means of dealing with the inflation at that time, which was about 20% till 30% on yearly basis. The system with indices has since then developed into several different indices that are actively used to adjust prices in contracts of all kinds. As a business developer said; "a consistently high index (for example IGP-M that measures price movements on distributor level) of prices and costs protects my company from losses". It is very comfortable to use a high index and bypass a complicated world with productivity increases. The use of indices is still driving the inflation, although on a different level.

• Brazil is basically a capitalistic country which does not mean that there are no monopolistic tendencies within many market segments. One example is the export industry, of which many are protected with high import duties. When the production is low, companies in the same segment tend to compete head to head, but when the production increases with the export, the prices on the local market tend to go through drastic price increases. Another example are all state owned companies and/or regulated markets like electricity, telecommunication, water, etc., where the prices for the services in many cases are higher than in the western world in absolute terms, while the quality of the service is lagging.

• The Brazilian government regularly issues notes with a very high yield on the domestic market and the banking sector channels savings into funds based on such notes. Due to the high yield on these notes, the saver can make 12% in net return per year which may influence price settings in companies and defer further investments.

One good way to combat the inflation is to increase the competition on the market. But to do that, it is necessary to attack difficult structural problems such as concentration of capital and assets within a small group, scare resources for new companies to enter the market, import duties, insufficient or unfinished privatization and deregulation programs, inefficient and weak competition regulators, the financial need of the government, etc. These problems are not easily handled and will require time, political consensus, and a consistent politic over many years.

	Inflation in Brazil	June 2005

Even if the inflation in Brazil always has been high, the country has never before experienced the levels reached between 1980 and 1995. For a long time, Brazil applied an expansive politics based on foreign capital, and when the capital on the world market drained in the beginning of the 1980ths, Brazil like many other countries in Latin America ended up with a too large external debt and finally started to print money. Several efforts were made to combat the inflation but they all failed, very much due to populist politicians who failed to implement a prudent fiscal politic. First when Fernando Henrique Cardoso where selected minister of economics could the inflation in Brazil finally be controlled. Under his leadership, the new Real Plan was introduced on July 1 year 1994, and the yearly inflation ratio has been on single digit level ever since. Low inflation, but to a high price? The average yearly inflation ratio the last 10 years has been somewhat lower than 8%, far from the days of hyperinflation in the 1980ths but still unacceptable with western standard. The goal of the government is now to reduce the difference from the western world, and a target to achieve around 4% in yearly inflation ratio by 2006/2007 has now been set. A further reduction of the inflation ratio would allow lower interest rates and thereby higher growth ratio of the economy, but to further reduce the inflation ratio is a problem of structural and partly historical character. • The common use of indices for adjustment of prices started already in the beginning of the 1960ths, as a comfortable means of dealing with the inflation at that time, which was about 20% till 30% on yearly basis. The system with indices has since then developed into several different indices that are actively used to adjust prices in contracts of all kinds. As a business developer said; "a consistently high index (for example IGP-M that measures price movements on distributor level) of prices and costs protects my company from losses". It is very comfortable to use a high index and bypass a complicated world with productivity increases. The use of indices is still driving the inflation, although on a different level. • Brazil is basically a capitalistic country which does not mean that there are no monopolistic tendencies within many market segments. One example is the export industry, of which many are protected with high import duties. When the production is low, companies in the same segment tend to compete head to head, but when the production increases with the export, the prices on the local market tend to go through drastic price increases. Another example are all state owned companies and/or regulated markets like electricity, telecommunication, water, etc., where the prices for the services in many cases are higher than in the western world in absolute terms, while the quality of the service is lagging. • The Brazilian government regularly issues notes with a very high yield on the domestic market and the banking sector channels savings into funds based on such notes. Due to the high yield on these notes, the saver can make 12% in net return per year which may influence price settings in companies and defer further investments. One good way to combat the inflation is to increase the competition on the market. But to do that, it is necessary to attack difficult structural problems such as concentration of capital and assets within a small group, scare resources for new companies to enter the market, import duties, insufficient or unfinished privatization and deregulation programs, inefficient and weak competition regulators, the financial need of the government, etc. These problems are not easily handled and will require time, political consensus, and a consistent politic over many years.