Opinion – Why? Economês in good Portuguese: World inflation is here and it shouldn’t disappear so fast

It is not just a Brazilian phenomenon. It caught fire all over the world, both in emerging economies and in the elite group of developed ones. In the US, it is around 8.5%; in England, around 9%. It seems that we are back in the early 1980s. Here are four relevant questions:

“Will pass?” Certainly.

“Quickly?” We believe not.

“It’s a problem?” Tricky question, but we lean towards no.

“There are MMTs-incendiary-inflationists infiltrating the Why?” Not that we know!

A perfect storm has brewed in recent years to wrench inflation in the developed world from its monotonous 2% and send it violently above 6%. A combination of troubled supply capacity and excessive stimulus capped off by a stupid war.

Why will inflation pass? Because, all over the world, actions are being taken to defeat it. Monetary and fiscal policies, which with the arrival of the plague in 2020 were placed in expansionist mode at the maximum level (these have never been seen before in the history of republics), are being reverted to normal. Monstrous fiscal deficits of 10% to 15% seen a few quarters ago are going to zero in several parts of the world and interest rates are rising, which will constrain consumption.

One example: real estate purchase rates in the US went from 2.5% to 5% in a matter of weeks! American house prices are stalling and will soon start to fall with that salty mortgage. There was, of course, in the advanced countries, a timing problem. While in emerging countries, as inflation gained traction throughout 2021, central banks began the process of normalizing interest rates, in developed countries, lethargy descended. They waited several quarters with inflation heating up before waking up to the reality that the dragon had awakened from its long hibernation. At this very moment, while interest in Brazil is higher than current inflation, in the United States it is about a tenth of it. Incredible!

In the 1980s, when Paul Volcker arrived at the US central bank to stamp out the damn thing, public debt as a proportion of GDP was around 30%. Today it is 125%, greater than anything the economy produces in a given year. In other words, if we took the entire North American GDP, all of it, with nothing left for people to consume or invest, and used it to pay the government debt, it would return to the level back there. This mountain of debt from developed countries (with rare exceptions) is a serious constraint to very abrupt interest rate adjustments. Very high debt entails risks of different natures, and high interest on top of high debt is like a turbocharged snowball. In short, raising interest rates as Volcker did in the 1980s could lead to a tremendous fiscal crisis. That’s why our bet is that in the developed world, interest rates will continue to rise, but not at high speed. This, of course, means that inflation will only fall very slowly.

Which is not necessarily bad if expectations of future inflation remain relatively anchored – and so far the de-anchoring of expectations has been modest. For the following reason: this surprise in inflation helps, to a lesser or greater extent, depending on other characteristics of the economy, to alleviate the fiscal side, to eat a little piece of debt, to adjust the civil servants’ real salary to a level more in line with the “equivalent employment” in the private sector.

But, as Brazilians, we are scalded cats and, therefore, we know well that uncontrolled inflation is not a solution to anything. The discussion is whether or not it makes sense to force your fall at a very fast rate. We believe not, even though they are orthodox.

Mauro Rodrigues (professor of economics at USP and author of the book “Under the magnifying glass of the economist”) and the team at Por Quê?