Brazilian inflation – 28/09/2021 – Why? Economese in good Portuguese

Inflation has taken a great leap. The last data we have is the IPCA-15, a kind of preview of the best known IPCA (the indicator that guides the actions of the Central Bank), released with data collected until the middle of the month in nine metropolitan regions. It hit double digits! That’s right, we reached 10% accumulated in 12 months, that is, in the year that ends in mid-September. In the year ending December 31, bets are on that number will drop a bit, to the neighborhood of 8.5%. Still, well above the 3..5% target set for the calendar year 2021. Whose fault is it? What should be done? Is it supposed to be scared?

The fault is always the fault of others, when it almost never really is. But, in this case, it seems that the truth is more nuanced. Although looking hard, it will be difficult to find in the historical series such a catastrophic period in terms of adverse external shocks pushing inflation up: (i) expensive energy; (ii) dollar commodities rising sharply; (iii) climate disrupting agricultural production; and (iv) relevant ruptures in world production chains. The problem is not exclusively national, nor does it only afflict emerging countries. Inflation in the developed world has been running close to 4% recently, a phenomenon that has not been seen for a long time.

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There are those who argue that the Central Bank was very bold in 2020, reducing the interest rate to 2% and signaling that it would stay there for a long time. but judgments in the aftermath are always problematic. More honest would be putting yourself in the shoes of the monetary authority back in May 2020, with Covid-19 on fire, negative growth scenarios around 8%, inflation expectations well below the target. Many people predicted, dear readers, an end-of-the-world scenario.

High inflation shouldn’t keep anyone from sleeping. What would justify a bad night’s sleep would be an inert, passive central bank. But that is not the case: interest rates have already risen from 2% to 6.25%. And they are going to rise even more, it seems (the Central Bank communication itself signals this). The most likely today is that the Selic will close the year 2021 at 8.25%. As the expected inflation for 2022 should, by the end of 2021, be around 4.5%, we will have in Brazil one of the highest real interest rates in the world again.

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The most obvious sign that the Central Bank has not been complacent is that interest rates were raised sharply amid an economic scenario of very, very high unemployment (how can an economy with so much unemployment be suffering from excess demand?). Another sign: market inflation expectations for 2022 are very close to 4%, even with the IPCA-15 hitting 10%. The risk in fact, looking ahead, is that we make a mistake in the dose of the medicine and end up with a very high Selic. The adverse supply shocks mentioned above are already going to hamper the economy’s recovery. Inflation at 4% instead of 3.5% is basically irrelevant. 14% unemployment, no.

Mauro Rodrigues (Professor of Economics at USP and author of the book “Under the Economist’s Lupa”) and the team from Why?

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