Brazil’s yearly inflation doubled in 2021 to highest level in 6 years

RIO DE JANEIRO, BRAZIL – The 2021 rate more than doubled the 2020 figure (4.52%) and was well above the 3.75% target set by the Central Bank for the year, although the margin of tolerance had been established at 1.5%, meaning that inflation could have risen to 5.25% without exceeding the target range.

The factors pushing the rate up this past year were higher fuel costs, mainly gasoline, and electricity, both of which shot up due to the coronavirus pandemic and the energy crisis the country has been mired in due to the lack of rain.

Fuel costs jumped by 49.02% during the year, while electricity costs rose by 21.21%, according to a report released Tuesday by the Brazilian Institute of Geography and Statistics (IBGE).

The steady price rises for gasoline during the year, which ended 2021 47.49% higher, were partly the direct consequence of the heavy devaluation the Brazilian currency suffered throughout the year. Although the Brazilian real began sliding in value years ago it slumped in 2020 due to the effects of the Covid pandemic around the world.

The U.S. dollar closed the year at R$5.574 to bid and R$5.576 to offer, after appreciating by 7.49% against the Brazilian currency in 2021, its 5th consecutive annual hike.

Regarding electricity costs, the main factor was the country’s water crisis last year. Due to the lack of rain, the reservoirs feeding the country’s main hydroelectric plants were at low levels, thus forcing the use of thermoelectric power generation to meet demand, a situation that has meant higher costs since September.

“That greatly impacted the result for electric energy, which has great weight in the index,” said IBGE’s inflation statistics coordinator Pedro Kislanov.

To a lesser degree, climbing food prices also added to the general price rise, mainly due to the skyrocketing price for coffee, up 50.24% as bean production was hit hard by frost in the second quarter.

According to IBGE, of the 9 product groups analyzed, 3 accounted for about 79% of the country’s inflation in 2021: transportation, housing and food and beverages.

In December, prices rose by 0.73% – with hikes in all 9 groups – but they decelerated compared to November and also compared to the same month in 2020 by 1.35%.

Analysts estimate that inflation this year will come in at 5.03%, a little above the target of 3.5% set by the Central Bank, albeit with a 1.5% tolerance margin.

In an attempt to control the upward price movement in recent months, the Central Bank has been raising the basic interest rate (SELIC), which closed 2021 at 9.25%, its highest annual level since 2017, when it stood at 10.25%, after 7 consecutive hikes.

Although the increase in the cost of money could aggravate the country’s current technical recession, the Central Bank has reiterated that its aim is to continue raising rates until inflation is controlled. Economists forecast that Brazil will end 2022 with its basic interest rate at 11.75%.

The gross domestic product of Latin America’s largest economy slipped by 0.1% in the third quarter compared to the prior quarter after having contracted by 0.4% over the previous three months.

Despite the negative result, the economy expanded by 3.9% over the 12-month period ending in September.

Government and market project that Brazil ended 2021 with growth of about 4.5% after contracting 3.9% in 2020 as a consequence of the Covid-19 crisis.