Andréa Novais

Andréa Novais

The Brazil Business


Inflation in Brazil

Andréa Novais

Andréa Novais

The Brazil Business


This article will give you an overview of how inflation has occurred in different moments of the Brazilian history, its current status and its projections in the new government.

During the second half of the 20th century, Brazil had the highest inflation levels in the world, surpassing rates of 1000% a year.

Brazilians often suggested that inflation was created to meet specific interests. Their theory is that inflation is not an economic or monetary phenomenon, but rather a distributive matter between the social groups that constitute the economy.

Inflation can be used as a tool for social groups that are directly connected to the means of production to expand their appropriation of the extra income created in the economic growth the country experienced in 70's.

Plano Real

Several measures were taken in order to control inflation in the 80's and early 90's, most of them related to monetary changes and the control of prices by the government.

In a period of time of 27 years, Brazil had seven different currencies. Most of the monetary changes were the reduction of three digits of the current currency. For example: 1 Ncr$ (cruzeiro novo) was equivalent to Cr$ 1000 (cruzeiros).

However, the government obviously could not freeze prices forever, so when it was no longer possible to control them, they would rise very quickly and intensely and a new monetary plan would be created.

After the failure of six monetary changes, Plano Real was created by the then finance minister Fernando Henrique Cardoso, who would launch the plan as the base of his presidential run a couple of months later.

The new currency was launched in 1994 and substituted the “cruzeiro real”: R$ 1,00 corresponded to CR$ 2.750,00. The accumulated inflation until the implementation of real was of 815,60% and the first inflation registered under the new currency was of 6,08%, a minimum record in many years.

People that are critical to Fernando Henrique Cardoso will explain that Plano Real only worked because the Brazilian society had already reached the maximum level of saturation with inflation to a point that even those who would benefit from it were willing to turn that page.

Plano Real's success can also be related to Fernando Henrique Cardoso's leadership. He gathered a highly qualified team of economy experts, convinced president Itamar Franco and mobilized political forces in the Congress and in society, besides conquering two presidential terms, that would allow him to closely develop his plan.

Inflation Target

It refers to an economic policy in which a central bank estimates and makes public a projected inflation rate. In Brazil, it was formally applied four years after the establishment of Plano Real.

When it was launched for the first time, in 1999, the inflation target was of 8%, the highest of them all. During the following years it has varied from 3,25% to 5,5%, with a predominance of 4,5% from 2005 to 2012.

Inflation rates have been stable with the exception of the periods of international crises. Showing that inflation is under control guarantees foreign investments and protects the economy against eventual crises, when investments are taken from emerging countries and applied in stable economies.

However, inflation is closely related to infrastructure: when production grows, it ends up facing transportation issues, so the offer stagnates, demand keeps growing, prices go up and inflation comes back.

So in order to keep “acceptable” inflation levels, the country needs to experience a significant and continuous process of development. But how to do it without interfering with the economical sectors that when facing the slightest change may cause inflation?

President Dilma Roussef and the future of inflation

President Dilma Roussef is preceded by president Lula, who left power with an 83% approval rating and whose support was essential to her victory .

Ever since president Lula took office, Brazil has been experiencing a significant growth. In this context, Roussef has the difficult task of keeping the country growing constantly, even when facing international crises, like the one faced in 2008. The big challenge is to reconcile economic growth with the control of inflation.

In recent pronouncement, Guido Mantega, Brazil's finance minister, ensured that the current administration aims to meet the inflation target of 4.5%, established to the years of 2011 and 2012, by Banco Central.

In order to achieve the target, Mantega, as a representative of the entire administration, is willing to reduce spending and for that, is relying on the support of the Judiciary and the Legislative to do the same. He also stated that the goal of the new administration is to decrease the public debts to 30% of the GDP.

Still according to him, Brazil is aiming for an economic growth that would not increase public debts or inflation levels.

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