Brazil is facing the old foe of inflation amid a widespread pandemic. The country’s central bank has raised interest rates to slow its hyperinflation, but experts say it still could take many years for things to get back on track.』
Inflation in Brazil has been a problem for decades. The country has struggled to keep up with the rising cost of living and has grappled with inflation since it first appeared in the 1980s.
SAN PAULO — Inflation is soaring in Brazil, forcing a nation with one of the highest Covid-19 fatality rates to deal with the pandemic’s economic consequences.
While the global economy is expected to grow by more than 4% next year, including in Brazil’s neighboring nations, more analysts predict that Brazil will stay in recession until 2022, as it faces one of the world’s highest annual inflation rates of 10.7%.
“Brazil sticks out—its inflation rate has grown far faster than virtually any other developing country, and you can see it affecting consumers,” said William Jackson, chief emerging-markets economist at Capital Economics in London.
Brazilian President Jair Bolsonaro’s initiatives to increase expenditure for the poor are being blamed for the currency’s depreciation.
Photo credit: Reuters/Adriano Machado
As companies and consumers emerge from lockdowns, inflation rates have risen to their highest levels in decades, driving up energy costs and causing supply bottlenecks from Canada to Germany. According to the government, inflation in the United States reached a 39-year high in November.
Brazil, which suffered from painful hyperinflation in the 1980s and 1990s, is now fighting an even harsher battle against its old foe—one that experts predict will stifle GDP for at least the next year. Credit Suisse and Ita Unibanco, one of Brazil’s largest banks, recently lowered their growth estimates, predicting a 0.5 percent contraction in the country’s GDP next year.
Before the outbreak, Latin America’s largest economy was hardly growing at all. Recent growth has been impeded by a steep drop in the price of iron ore, one of Brazil’s biggest exports, since July. The return of inflation, however, is proving to be the most significant impediment to economic recovery, according to experts.
According to the Organization for Economic Cooperation and Development, Brazil’s 12-month inflation rate of 10.7% is the third highest among the major established and developing nations that make up the Group of 20, after Turkey and Argentina. A severe drought, the worst in in a century, has fueled inflation by depleting hydroelectric reservoirs and increasing demand for more costly thermal power plants.
A steep depreciation in the Brazilian real, which has lost roughly 25% of its value versus the dollar in the last two years, has pushed up the cost of imported products, notably gasoline, contributing to inflation.
For millions of Brazilians, rising inflation has made meat unaffordable.
Getty Images/Mauro Pimentel/Agence France-Presse
President Jair Bolsonaro’s attempts to increase expenditure on the poor ahead of the election next year, at the price of the country’s fiscal health, are largely to blame for the currency weakening. By strengthening the dollar against currencies like the real, upcoming interest rate hikes in the United States risk raising inflation even more in Brazil and other emerging-market countries.
Brazil’s history of hyperinflation makes it more difficult to combat current price increases. One relic is indexation, in which the government relates expenses like salaries to inflation to safeguard enterprises’ and typical Brazilians’ buying power in the face of rising prices.
On the negative, transient price shocks, such as those impacting the global economy, might become permanent. For example, a brief rise in the price of oil raises earnings and improves demand for other items.
“Brazil’s condition is worse than everywhere else in Latin America and the globe,” said André Perfeito, head economist at Necton, a brokerage in So Paulo. “Indexation has the unintended consequence of magnifying external price shocks.”
Some economists see the region’s recent swift success in vaccinating large swathes of the population, permitting a sudden return to a practically normal existence, as a harsh reward for the region’s rapid accomplishment in vaccinating large swaths of the people. About 65 percent of all Brazilians are now completely vaccinated against Covid-19, which is higher than the United States and a significant increase from just 11 percent six months earlier.
The Brazilian central bank’s interest rate hikes have sparked fears that they could suffocate the country’s post-pandemic recovery.
Photo credit: Reuters/Amanda Perobelli
The poor, who were already suffering from the epidemic, have been crushed by the return to double-digit inflation. According to the University of Oxford’s Our Globe in Data project, more than one in every nine persons who died from Covid-19 over the world came from Brazil, which has the highest per capita mortality rate from the illness among the 40 most populated nations.
Lucilene de Souza, a single mother of three from So Paulo, has been unable to consume meat for months, as have millions of Brazil’s poorest households. She spends her days begging for food outside a shopping mall after losing her job at a restaurant when the epidemic struck almost two years ago.
“I’m terrified… “My youngest is just four years old, and I can’t afford what he requires,” she said. “With costs like these, government subsidies aren’t enough.”
Economists anticipate that 12-month inflation would decrease to 5% by the end of next year and 3.5 percent in 2023, indicating that the country’s price hikes will not spiral out of control. Instead, the greatest risk is that Brazil’s central bank’s aggressive interest-rate hikes to battle inflation would suffocate any post-pandemic economic rebound.
The central bank has increased the benchmark lending rate by more than 7 percentage points to 9.25 percent since March, bringing it from a record low of 2% to its highest level in more than four years. It is expected to hit double digits next year, according to economists.
In Brazil, where older generations remember the dark days of hyperinflation wiping away their savings and sending them scurrying to the food store after every paycheck, the central bank is still fighting to establish its worth.
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While the United States’ Federal Reserve and other developed-country central banks have adopted a cautious approach to what they perceive as transient price spikes in the aftermath of the epidemic, Brazil does not have that luxury. According to Alberto Ramos, an economist at Goldman Sachs, the central bank has little option but to hike rates quickly if it wants to avoid a worsening situation.
If the central bank does not hike rates, Brazil risks losing control of inflation expectations, allowing firms to charge more and workers to demand greater salaries if they anticipate prices to rise, fueling inflation. Given Brazil’s history of soaring prices, any indication that the central bank is losing control of inflation risks frightening away foreign investors, resulting in widespread capital flight, a depreciation of the Brazilian currency, and a resurgence of inflation.
“If they do nothing, inflation will rise… Mr. Ramos said that “it gets a lot more expensive to pull down later on.”
Economists say the global price spikes could not have come at a worse moment for Brazil’s central bank.
The government granted the central bank legal independence earlier this year, after decades of dispute. Internal pressure has mounted on the central bank’s monetary committee to become even more hawkish. This year’s 12-month inflation is already likely to surpass the country’s 3.75 percent objective by a significant margin.
Mr. Perfeito said, “The central bank will not want to miss the 2022 objective either.” “Can you imagine how it would appear?” They gain independence, then fail to meet the aim for the second year in a succession.”
Samantha Pearson can be reached at [email protected]
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Brazil is currently in a state of economic crisis, with the country struggling to deal with inflation and a pandemic. Reference: brazil economic crisis 2021.
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