Brazil grapples with ex-nemesis inflation amid pandemic



SÃO PAULO — Inflation is rising in Brazil, forcing a country with one of the highest death rates from Covid-19 to fight the economic fallout from the pandemic.

As the global economy is expected to rebound by more than 4% next year, including in countries bordering Brazil, more economists expect Brazil to remain stuck in recession in 2022 so fight one of the world’s highest annual inflation rates of 10.7%.

“Brazil really stands out – its inflation rate has increased much faster than almost any other emerging economy, and you can really see it hitting consumers,” said William Jackson, chief emerging markets economist at the London-based research firm Capital Economics.

Brazilian President Jair Bolsonaro’s efforts to increase spending for the poor are seen as a weakening factor for the Brazilian currency.


Adriano Machado / Reuters

Inflation rates from Canada to Germany are at their highest level in decades as businesses and consumers emerge from lockdowns, raising energy prices and causing supply bottlenecks. US inflation hit a 39-year high in November, the government said on Friday.

Brazil, which suffered from punitive hyperinflation in the 1980s and 1990s, has faced a tougher fight against its old nemesis, a struggle that economists say could weigh on growth for at least the next year. next year. Credit Suisse and Itaú Unibanco, one of Brazil’s largest banks, recently downgraded their growth forecasts and now forecast the country’s economy to contract 0.5% next year.

Latin America’s largest economy was growing only slowly before the pandemic hit. A sharp drop since July in the price of iron ore, one of Brazil’s main exports, has hampered recent growth. But the return of inflation is proving to be the biggest obstacle to economic recovery, economists say.

At 10.7%, Brazil’s 12-month inflation rate is third among the major developed and emerging economies that make up the Group of 20, after Turkey and Argentina, according to the Organization for Cooperation and Development economic. A severe drought, the worst in nearly a century, contributed to inflation, drying up hydroelectric reservoirs and increasing demand for more expensive thermal power plants.

A sharp depreciation of the Brazilian real, which has lost about 25% of its value against the dollar over the past two years, has pushed up the price of imported goods, including fuel, which has contributed to inflation.

Accelerating inflation has made meat unaffordable for millions of people in Brazil.


Mauro Pimentel / Agence France-Presse / Getty Images

President Jair Bolsonaro’s efforts to increase spending for the poor ahead of next year’s elections, at the expense of the country’s fiscal health, are partly to blame for the weak currency. Looming interest rate hikes in the United States risk further boosting inflation in Brazil and other emerging market economies by strengthening the dollar against currencies such as the real.

The history of hyperinflation in Brazil makes it harder to fight rising prices today. One holdover is indexation, whereby the country links costs such as wages to inflation to protect the purchasing power of businesses and average Brazilians amid soaring prices.

The downside is that temporary price shocks, such as those affecting the global economy, end up lingering. A temporary surge in the price of oil, for example, raises wages and stimulates demand for other goods.

“Brazil’s situation is worse than elsewhere in Latin America and other countries around the world,” said André Perfeito, chief economist at Necton, a São Paulo-based brokerage house. “Indexation ends up amplifying external price shocks.”

Some economists point to the particularly high inflation rates in Brazil and much of Latin America as a cruel reward for the region’s rapid progress in vaccinating entire swathes of the population in recent months, allowing a abrupt return to an almost normal life. About 65% of all Brazilians are now fully vaccinated against Covid-19, more than the United States and a large increase from six months ago, when only 11% were fully vaccinated.

Brazil’s central bank interest rate hikes raise concerns that they will crush the post-pandemic economic recovery.


Amanda Perobelli / Reuters

The return to double-digit inflation had a crushing effect on the poor, who were already reeling from the pandemic. More than one in nine people who have died from Covid-19 globally were from Brazil, which has the highest per capita death rate among the 40 most populous countries, according to the University’s Our World in Data project of Oxford. .

Like millions of the poorest families in Brazil, Lucilene de Souza, a single mother of three from São Paulo, hasn’t been able to afford meat for months. After losing her job at a restaurant when the pandemic struck nearly two years ago, she spends her days begging for food outside a mall.

“I’m scared… my youngest is only 4 years old and I can’t afford what he needs,” she said. “Government aid is not enough with prices like this. “

Economists see no risk of price increases getting out of hand in the country, predicting 12-month inflation will slow to 5% by the end of next year and to 3.5% in 2023. The deeper concern, on the contrary, is that the aggressive interest rate hikes that Brazil’s central bank uses to fight inflation will crush any post-pandemic economic recovery.

Since March, the central bank has raised the key rate by more than 7 percentage points to 9.25%, taking it from a record high of 2% to its highest level in more than four years. Economists expect it to hit double digits next year.

In Brazil, where older generations remember the dark days when hyperinflation wiped out their savings and sent them rushing to the grocery store after every paycheck, the central bank is still fighting to prove its credibility.

While the US Federal Reserve and other central banks in developed countries have taken a cautious approach to what they see as temporary price shocks in the wake of the pandemic, Brazil does not have this luxury. The central bank has no choice but to aggressively raise rates if it is to avoid an even worse scenario, said Alberto Ramos, economist at Goldman Sachs.

If the central bank does not raise rates, Brazil risks losing control over inflation expectations, creating a scenario in which companies could charge more and employees demand higher wages if they expect an increase. rising prices, thus fueling inflation. With the history of soaring prices in Brazil, any sign that the central bank is losing control over inflation risks scaring off foreign investors, potentially causing massive capital flight, weakening the Brazilian currency and stoking inflation. .

“If they don’t act, inflation rises … and then becomes much more expensive to reduce later,” Ramos said.

Global price spikes could not have come at a worse time for Brazil’s central bank, economists said.

After decades of debate, the government gave the central bank formal independence earlier this year. This has increased internal pressure on the central bank’s monetary committee to be even more hawkish. Year-over-year inflation is already expected to significantly exceed the country’s 3.75% inflation target this year.

“The central bank won’t want to miss the 2022 target either,” Perfeito said. “Imagine what that would look like? They get independence, and then they miss the target two years in a row.

Write to Samantha Pearson at

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