Carlos Vieira, a carpenter in São Paulo, hoped runaway inflation was consigned to Brazil’s past.
Now, with the cost of his materials doubling in just three years, he fears those days are back. “Since I set up the workshop in 1998, I’ve never seen anything like this . . . There have always been ups and downs, but now we’re suffering from this crisis and the one before,” the 57-year-old said, referring to the Ukraine war and the pandemic.
At 12 per cent, annual inflation in Brazil is now at an almost two-decade high. Triggered by the surge in global food and fuel costs, officials are increasingly concerned that price pressures are becoming entrenched across the economy.
Roberto Campos Neto, central bank governor, told reporters in April that a sharp rise in the cost of items such as clothing and eating out in recent months “came as a big surprise”.
Inflation is nowhere near as bad as it was in the 1980s and 1990s, when supermarkets would remark prices twice a day to keep pace with the rising prices. After surging to a record 4,500 per cent in the year to June 1994, measures ranging from the introduction of a new currency, the real, to granting the central bank independence, helped bring price pressures under control.
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But the spectre of Brazilian hyperinflation was never entirely banished. Many contracts — covering everything from rented accommodation to the supply of raw materials — still contain automatic adjustments, a legacy of the times where prices and wages routinely rose by between 30 and 40 per cent a month.
Some contracts, such as those for rents as well as telephone and electricity charges, use the alternative measure of wholesale inflation, which at 15 per cent is significantly higher than the consumer price index.
The wholesale measure, which is weighted towards producer prices, was above 40 per cent for much of last year, putting pressure on businesses such as Viera’s carpentry workshop. He said his margins had been squeezed by almost a third over the past three years.
The prevalence of these inflation-linked contracts is hampering efforts by the Brazilian central bank to bring inflation under control and raises the risk of prices spiralling. Alessandra Ribeiro, economist at Tendências, a consultancy in São Paulo, said: “The battle is that much harder and the central bank has to be more aggressive.”
Banishing inflation was a battle that, until recently, the central bank seemed to have won. Brazil’s policymakers, who were early adopters of inflation targeting, had won enough credibility to cut the benchmark Selic rate to just 2 per cent in 2020. That trend is now in reverse.
The Selic has been raised 10 times since March last year to 12.75 per cent. An 11th rise is expected to take the rate to 13.25 per cent next month.
To make matters worse, the central bank’s increases threaten to choke off demand and trigger a recession. Growth is already anaemic and there is a high prospect of a serious bout of stagflation, where inflation soars and output stagnates. Output this year is predicted to grow just 0.7 per cent, according to a central bank survey of market economists. The prediction for next year is barely any better, at just 1 per cent.
Meanwhile, moves by their US counterparts look set to place monetary policymakers in Brazil in a bind where they can do little to put growth back on track. While the real has strengthened against the dollar this year, rate rises from the Federal Reserve in the coming quarters threaten to undermine those gains.
In such a climate, cutting rates risks a fall in the currency, raising the cost of imports and leading investors to ditch assets.
“At some point central banks [in the region] will have to cut rates,” said Alberto Ramos, head of Latin American economic research at Goldman Sachs in New York. “But some time in 2023 the [Fed] is going to be in full hiking mode. It’s going to be very difficult for those central banks to cut while the Fed is hiking.”
While Brazil’s problems are exacerbated by its history of high inflation, they are not unique. Prices are rising fast across emerging markets at an average annual rate of almost 14 per cent, twice that of advanced economies. Argentina’s headline inflation is running at close to 60 per cent a year.
The pain is particularly acute for poorer people, who spend a relatively large part of their income on food and are exposed to sharp rises for products such as household fuels used for cooking and heating, which are up by more than 30 per cent in Brazil.
Higher energy prices have also sparked unrest. In March, Brazil’s government hastily cut fuel taxes after lorry drivers staged the latest in a series of protests at rising diesel prices, blocking highways with burning tyres.
“There is absolutely no doubt that inflation is a tax, and a socially regressive tax, that disproportionately affects low-income households,” said Ramos. “It is a serious problem everywhere in Latin America.”
Source: Economy - ft.com
