Brazil's Scars Linger Even With Inflation Healing Nicely

Brazilians are finding it hard to put memories of hyperinflation behind them
From

Long gone are the hyperinflation days in Brazil when supermarket workers patrolled the aisles with labeling guns, marking up prices more than once a day. But Brazilians can’t seem to forget. It’s sort of a collective trauma, and there has been only one — brief — occasion over the past 20 years when more people expected inflation to slow than to accelerate.

That may help explain why after the most recent inflation spike, brought on by unwinding of government controls and by food price shocks, still more than half of Brazilians say faster inflation remains in store. It’s as though they’re ignoring the fact that the inflation rate has been more than halved from double digits in just over a year. (Or they're confusing deflation, when prices fall, with disinflation, when prices rise less.)

Yet, as of Wednesday, Brazil's inflation rate has dropped below the government’s target for the first time in nearly seven years. The slump is allowing the central bank to aggressively lower interest rates. What’s more, Brazil suddenly finds itself home to the slowest inflation among Latin America’s top four economies.

Some see this as reason for celebration; others howl it's the unintended byproduct of a two-year recession, the deepest on record, from which the region's largest economy has yet to emerge. While it's hard for Brazilians to cheer up with an unemployment rate of 13.7 percent and rising, no one wants inflation to speed up again, and the fact that it reached target marks a step toward greater economic stability.

The final redoubt of inflation is in services, which include everything from health insurance and hairdressing to braces and bikini waxes -- things that millions of Brazilians who joined the middle class have been reluctant to stop paying for even during the recession. With unemployment still rising, the services sector will finally take a hit and finish 2017 with its slowest inflation in nearly 17 years, according to Marcio Milan, an economist at Tendencias Consultoria Integrada.



And so headline inflation will end the year nearly half a percentage point below target, according to economists surveyed by the central bank. That has fueled calls for the government to seize the opportunity to lower the inflation target for the first time in 14 years. Finance Minister Henrique Meirelles told reporters this week that, until authorities convene next month to set the target, they will "observe everything with a lot of care in order to make the right decision."

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE