Analysis: Brazil may suffer from the return of inflationary memory

With the result released today, once again the 12-month accumulated IPCA reinforces the persistent upward trend in inflation. Since May 2020, when the index accumulated in 12 months was 1.88%, we have added 17 consecutive increases, now reaching 10.67% in October.

In fact, this is not just a momentary global high and should not be exclusively attributed to the side effects of the restrictions imposed by Covid-19 in Brazil and in the world.

In Brazil today, inflation has found fertile ground to spread. It started at the end of last year with one-off and localized increases in fuels and was cultivated with a looser monetary policy throughout the first half of this year.

From mid-year onwards, the institutional misalignment environment between the three powers resulted in an exchange rate devaluation even stronger than almost any other currency in the world. As an example, we can mention that since June 2021 until now, the real has devalued more than the Argentine peso against the dollar.

The three factors above contributed to the spread of inflation in all nine groups of products and services measured by the IBGE.

Now, we live under the risk of the return of an old phenomenon that so haunted the Brazilian economy: the inflationary memory.

Even after the Plano Real, Brazil maintained indexation clauses in several concessions and contracts, that is, automatic readjustments based on the variation of IPCA, IGPM, INCC and other inflation indicators. From tolls to collective bargaining agreements.

Thus, with inflation persisting in double digits per year, it will be more difficult to fight it, as it feeds back automatically and inertial.

With the scenario described above, what should we expect for the coming months? Stronger action to raise interest rates by the Central Bank, which unfortunately, although necessary, will not be enough to reduce inflation.

We will enter 2022 in a very challenging and unfavorable environment to fight inflation. Probably, the task will remain, as another cursed legacy, for the next government from 2023 onwards.