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Inflation in Brazil

In March, inflation in Brazil surpassed the government’s target ceiling for the first time since 2011 as the country’s IPCA consumer price index, which is produced by the Instituto Brasileiro de Geografia e Estatistica, rose 6.59 percent over 12 months—just above the target of 6.5 percent.

The impact on the economy was felt quickly by poorer Brazilians. Prices for basic food items such as onions, tomatoes, carrots, manioc flour, garlic, and potatoes increased over 50 percent over the last year. 

According to a study by Fecomércio, Brazil’s commerce federation, the ability to acquire basic food products did not change for Brazilians from the upper classes (classes A and B), but the Brazilian middle class (class C) was forced to reduce spending by 3 percent points between January and March. Meanwhile, the lower classes (classes D and E) saw their consumption of basic food products decrease by 11 percent in three months.

As a result, Brazil’s central bank has decided to increase interest rates from 7.25 percent to 7.5 percent. The government also decided to eliminate all federal taxes on a list of basic food items. “We’re experiencing…a natural growth in inflation due to seasonal factors,” said Brazilian Finance Minister Guido Mantega, who said that inflation was “under control” and that the summer crop harvest would decrease the cost of produce for consumers.

Unfortunately, the government’s measures to curb the consumer price index have so far produced underwhelming results. While inflation slowed to 6.49 percent in April, consumer prices rose by 0.55 percent points—up from the 0.47 percent point increase seen in March.

Renato Fragelli, a professor of macroeconomics and monetary economics at the Fundação Getúlio Vargas in Rio Janeiro, blames the current inflation on government policies to expand credit and intervene in the value of the real. “Expanding credit lines meant the possibility of buying a house and boosting economic growth,” Fragelli said. “Now it has a consequence: inflation. The Central Bank is right to increase [interest] rates. It will control inflation. But now, perhaps it will be harder to get investor confidence back. Perhaps [the Central Bank] should be even tougher.”

So far, in 2013, Brazil has been harvesting record sugarcane, corn, soybean, and rice crops. However, the inability to ship these commodities to China during a time of huge demand—due to a backlog at Brazil’s overloaded ports—is causing prices to skyrocket. Unlike the other top food-supplying nations, like the United States and Argentina, ports in Brazil do not operate 24 hours a day. Meanwhile, new regulations have limited truck driving hours, and oil and gas prices have increased in the last few months. For the first time in years, oil giant Petrobras readjusted prices after a record decline in profits in February.

Augusto Pinho de Bem, a researcher at the Fundação de Economia e Estatística do Rio Grande do Sul, argues that the high international price of commodities affects domestic prices, and that Brazil’s inflation problem is just a matter of costs: “If the external prices are better, you will want to be paid the same price domestically, or at least a little more. There is not inflation in demand; it's about…the cost of labor and food.”

A survey released last week by the Federação das Indústrias do Estado de São Paulo (the Federation of Industries of the State of São Paulo—FIESP) indicates other problems. The report states that countries with efficient import-export systems such as the U.S., Canada, Singapore, and South Korea can admit goods through airports in less than six hours; in Brazil, it takes 62 hours. The cost to ship a container to a Brazilian port is $1,790, while it costs only $621 elsewhere. Meanwhile, just 19 percent of Brazil's roadways are paved. The study concludes that Brazil’s infrastructure has changed very little in the last 10 years.

The result has broad implications on inflation and the cost of basic goods in Brazil. In the end, according to Fragelli, it “all greatly impacts basic food prices.”

*Luís Henrique Vieira is a guest blogger for AQ online. He is a freelance journalist based in Porto Alegre, Brazil.

Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.


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