High inflation returns to Brazil: ‘every week has different prices’

For Vania Barbosa, it was getting harder and harder to cover the basics. The 40-year-old single mother living on the outskirts of Brasília used to buy a kilo of minced beef or knuckles weekly, but has now switched to the cheaper one just once a month.

“Every week you go grocery shopping, there are different prices,” the restaurant employee said. “Sometimes I have to grab a piece of fruit, a mango, or remove the soapbox and not wash it until next week.”

Her difficulties reflect the unrest hitting the pockets of many in Latin America’s most populous country, after soaring costs for everything from gasoline to meat pushed up inflation. double-digit level for the first time in more than five years.

Faced with discontent over living standards as he prepares for his re-election campaign next year, President Jair Bolsonaro insists it is a worldwide problem.

The rebound in commodities like crude oil and food, as well as supply chain bottlenecks following the coronavirus disruption, have contributed to the global phenomenon.

“But another part of the reason is domestic,” said Caio Megale, chief economist at investment brokerage XP. “Our exchange rate has depreciated more [many] other currencies, causing inflation with greater force. ”

Since the beginning of 2020, the real has lost a quarter of its value against the dollar and is down 5% so far this year.

Brazil’s consumer prices rose in October, pushing inflation to 10.67% year-on-year, higher than expected and the strongest increase for that month since 2002. Among the G20 nations, it only behind Turkey (20%) and Argentina (52%). cents), according to OECD data.

Over the past 12 months, shoppers in Brazil have seen products increased sharply from refined sugar (48%) and cooking gas (38%) to airline tickets (50%).

Simultaneously, The worst drought in nearly a century boosted hydroelectricity production and forced utility companies to turn on more expensive thermal power plants, resulting in skyrocketing electricity bills.

The effects are being felt more by people with lower incomeand researchers say there were hunger increase since the beginning of the pandemic.

Wealthier residents in places like São Paulo also see indirect effects, including longer Uber wait times.

While traffic has returned to the country’s largest city with the lifting of Covid-19 restrictions, drivers say an increase at fuel pumps has made some trips less appealing. , although the platform has recently increased the price of a ride home.

“Sometimes it’s not worth picking up customers. You’re losing money – you’re paying to go to work,” said one driver, Sergio Pereira, who logged into the app over the weekend.

With Bolsonaro following opinion polls with former leftist president Luiz Inácio Lula da Silva, who is tipped to challenge him for the presidency in the October 2022 elections, the government intends to push ahead money transfer scheme for the poorest citizens.

However, some observers fear these plans could exacerbate inflation, even as the central bank raises interest rates to counter the price hikes that hamper growth.

To pay for extended welfare program, the administration wants to change the constitutional spending limit to limit budget increases and is seen by investors as a pillar of Brazil’s economic reputation. The draft bill before Congress would also delay the payment of some judicial debts.

Critics see the maneuver as a worrisome sign that fiscal precision may be abandoned. That, they argue, risks a negative spiral, putting more pressure on the currency, which in turn pushes up the value of imports and dollar-denominated goods.

Arminio Fraga, a former president of the central bank, said that while the additional amount issued of their own “may not be the end of the world”, the package could lead to the perception among investors that “The culverts have been opened and the government could default on a legal obligation”.

He added: “It allows bad scenarios to creep into the picture. “I think the kind of inflation that we had in the 80s, even 70s would be a surprise. But can we rule it out completely? I’m afraid not. ”

The country is now free from past stratospheric hyperinflation, which was remedied in the mid-1990s with a macroeconomic stabilization plan that introduced a new currency.

However, some economists are now talking about the possibility of “fiscal dominance”. This refers to when monetary policy becomes less effective on inflation, or even counterproductive, as lower borrowing costs increase the government’s debt service burden and raise suspicions about doubts around public finance.

From Brazil central bank is one of the most hawks in the face of inflation, having raised the benchmark Selic rate six times this year, from an all-time low of 2% to 7.75%.

However, the softening effect of a higher rate on economic activity has contributed to the lower gross domestic product forecast. The possibility of little-to-zero growth in 2022 is raising the specter of stagnant inflation.

Despite the gloom, the coin has regained some ground this month and there is hope that a major source of price pressure will ease from May, when the emergency electricity tariff is about to expire.

“With a stronger stance from the central bank and a likely deceleration in the global economy, inflation should ease,” said Megale at XP.

“But the bottom line will remain public accounts. If we fail to balance it, inflationary pressures will become more and more persistent in the economy.”

Zeina Latif, an economic consultant, believes Brazilians accustomed to moderate price increases will show displeasure at the ballot box. Bolsonaro “was confused with something he shouldn’t have,” she said.

Additional reporting by Carolina Ingizza in São Paulo

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