Brazil among world leaders in inflation persistence – study alerts

RIO DE JANEIRO, BRAZIL – A study by Credit Suisse shows that the effects of price hikes last longer and with greater intensity in the country.

A study by Credit Suisse economists shows that Brazil ranks first among emerging countries in terms of inflation persistence, and if it is careless with very high inflation, it could experience even greater persistence in the future.

The indicator used by the bank is how much theoretically temporary shocks affect the economy’s price level. Brazil scores 3, which means that if a price hike in fuel or other commodities causes a 1% increase in inflation, when this shock dissipates the price level of the economy will be 3% higher.

In a group of selected countries, Brazil is in the lead, just above South Africa. Countries like Chile, Hungary and Turkey are in a second group, with indices close to 2. With an even lower persistence are Mexico, China and India, with an index just over 1.

This 3 index for Brazil reflects the average inflationary persistence since 2002. Over time it has fluctuated widely, at times rising and others dropping, reflecting factors such as the credibility of the Central Bank, fiscal policy, the shocks that have impacted the economy, and the level of indexation in the price system.

During Alexandre Tombini’s administration of the Central Bank, it was higher, nearing 3. It dropped to its current levels during the Ilan Goldfajn administration, fluctuating just above 2.

But the indicator may soon rise again, depending on the behavior of inflation, caution Credit Suisse economists. History shows that inflationary persistence tends to follow current inflation. Since late 2020, inflation has risen, and while so far inflation persistence has not kept up, things can quickly change.

The Central Bank has refrained from adopting an even more conservative stance on interest rates, despite high inflation, precisely because of the argument that the pressure on price indexes is temporary.

Credit Suisse’s chief economist Solange Srour, one of the study’s authors, together with the bank’s economist Lucas Vilela, argues that the monetary authority should recognize that the price shock is long-lasting. “The Central Bank should stop saying that inflation is temporary. This temporary began in September,” he says.

She points out that, in theory, a 7-month price hike could actually be considered temporary. But many shocks occurred simultaneously, affecting different economic sectors, triggering a widespread increase in prices.

For now, service prices are an exception, due to the economy’s shutdown during the pandemic, but they may quickly react when the economy reopens. The pressure on prices resulting from the rise in the dollar may continue because, to a large extent, it reflects the uncertain fiscal environment.

The economist also says that there is a risk of the international inflationary environment becoming more persistent, due to monetary and fiscal stimuli from advanced economies. The bank projects inflation at 5% this year, which is being re-examined, and at 4% next year.

Credit Suisse’s calculations of inflation persistence take into account the price level, rather than the inflation rate. The persistence of shocks to both inflation and the price level can be measured. Both go hand in hand – if persistence is higher for the price level, it is because persistence in the inflation rate has also become higher.

The inflation rate represents the increase in prices in the economy over a period of time, typically a month or a year. The price level shows how much more expensive products have become. If gasoline prices rise 5% one year and are stable the next, the inflationary shock was temporary. In the second year economists will say that gasoline inflation was zero.

But the fuel price level – the one that really matters to those who fill up their car’s tank – was 5% higher at the end of that two-year period. “People always follow inflation, but welfare is determined by purchasing power,” says Solange Srour.

Source: Valor