By Anna Fitzpatrick, Contributing Reporter
SÃO PAULO, BRAZIL – Historically, the thorn in the side of Brazil’s economy has always been inflation and last week the rolling twelve month inflation rate was reported as 7.23 percent by the Central Bank. This is the first time that inflation figures have not been inside the government target rate of 4.5 percent, give or take two points in either direction, since the rate was adopted in 2006.
The figure in itself is not completely surprising – earlier in the year it was admitted that it would be a difficult task to bring it back within the target range as prices crept up; particularly the cost of labor.
What has come as a surprise is the Central Banks decision to cut the SELIC rate or interest rate from 12.50 percent to 12 percent. A cut that has since been defended by COPOM (the Monetary Policy Committee) in light of reduced expectations across the world for economic growth.
The move will fuel expectation of further cuts throughout the end of 2011, and is a change from the increases that have gone previously throughout the year. The decision to cut rates was not a unanimous one, decided by five votes to two.
The COPOM still expects inflation to fall within the 4.5 percent plus or minus two points by the end of 2012. It is anticipated that problems on a macroeconomic level across the globe will serve to cut demand. “Imported” inflation is difficult for the government to control particularly the high prices of agricultural commodities on the international market and political instability elsewhere, particularly in the oil producing Middle East, which has driven up oil prices.
Tightening public purse strings will also serve to dampen demand in the domestic economy, which is still buoyant. Indeed, President Rousseff has already acknowledged a limit to public spending in an attempt to rein in inflation. Despite changes on a global level, domestic demand remains strong as unemployment stays low and credit is readily available.
Food prices increased in August by 0.72 percent despite falling in July, particularly affecting the price of meat. House prices also increased, as reported last week in SP prices were up nearly 19.50 percent with the cost of Rio real estate increasing even faster per square meter.
It is reported that it is the middle classes that feel the pinch of inflation the most, with estimates that inflation in the middle class sector are around the 8.9 percent mark, even higher than the IPCA rate of 7.23.
In 1980s Brazil suffered a lot with raising prices and low GDP. At the peak, the Consumer Price Index (IPCA) rose to thousands in the 1990s. In the last three decades the currency has changed its name five times and Brazil has had eight economic plans that have all attempted to curb inflation.