After years of raging inflation, Brazilians suddenly see a remarkable turnabout. The price spiral has slowed from a 45% monthly rate in June to an estimated 4% in August. It appears that the real, the dollar-linked currency launched on July 1, is living up to its inflation-fighting promise.
The real's success seems likely to propel the currency's architect, Fernando Henrique Cardoso, into Brazil's presidency. That prospect brightens the outlook for free-market reforms, from deficit-spending curbs to privatization of telecommunications giant Telebrs. Betting on such a scenario, foreign and local investors have been boosting share prices on Brazil's stock markets--up 36% in the first three weeks of August.
Cardoso is looking strong. A late August poll showed the former Finance Minister widening his lead with a 43% rating, vs. 23% for leftist Lus Incio Lula da Silva, his only major rival in a multicandidate field. Cardoso is clearly getting credit among voters for the impact of the new currency, along with deficit-spending cuts he pushed through Congress before resigning his Finance post in April. Running as the candidate of the center-left Party of Brazilian Social Democracy, Cardoso is also allied with the center-right Liberal Front Party and is attracting broader political and business support.
If elected this fall, Cardoso could face opposition to further economic reforms from some of these supporters, whose pork-barrel patronage would be jeopardized by future spending cuts. Even before the election, Cardoso's bandwagon could get sidetracked if inflation is reignited by cost-of-living wage hikes that business sectors are expected to start granting in September. But the government is countering inflation with high interest rates and tight money. And if necessary, it plans to slash import tariffs to keep the lid on local prices--at least until the election.