Inflation soars in Brazil during periods of political tension, economists say

Throughout the 21st century, Brazil has three periods of stronger inflation, with double-digit highs in the 12-month period. These are the ranges from 2002 to 2003, from 2015 to 2016 and now to 2021.

Although they differ, these periods have at least one element in common: the additional impact caused on the economy by political uncertainties or crises, economists point out.

The uncertainties and tensions in the course of policy in Brasilia affect prices especially because they affect the exchange rate, according to analysts.

The effect on the currency rate occurs because a scenario of uncertainty creates stress in the financial market and insecurity among investors, encouraging foreigners — and even Brazilians — to maintain their reserves abroad.

A high dollar, compared to the real, makes imported products more expensive and also encourages the export of national goods with a weight in local consumption. The two movements in the trade balance help to push inflation up.

“These three moments of higher inflation [2003, 2016 e 2021] they are marked by political uncertainties that had an impact on the exchange rate”, says economist Pedro Dutra Fonseca, a professor at UFRGS (Federal University of Rio Grande do Sul).

“In 2002, the market saw uncertainties before Lula’s election. In 2016, ex-president Dilma was impeached. What happens now is a new political uncertainty, aggravated by the impasse in the spending ceiling.”

According to economists, it is necessary to remember that inflation is currently a global phenomenon, triggered by the restrictions of the pandemic.

The pressure on prices is fueled especially by the break in the supply chain of several products, the readjustment in the value of some services that were interrupted and also by the increase in the consumption of raw materials.

Inflation in the United States, for example, reached the highest level in three decades.

However, the exchange rate accentuates the problem in Brazil, explains economist Matheus Peçanha, a researcher at FGV Ibre (Brazilian Institute of Economics of the Getulio Vargas Foundation).

“Countries with a more mature economy are also suffering from inflation now, but the problem of emerging countries is even greater. With any uncertainty, capital flees from them,” says Peçanha.

In the 12-month period until October, the IPCA (Broad National Consumer Price Index) accumulated a high of 10.67%, according to the IBGE (Brazilian Institute of Geography and Statistics).

Meat, soy and its derivatives, such as cooking oil, corn and wheat, which are in the composition of various processed foods, and iron ore, essential in the manufacture of numerous products, are examples of raw materials that react to the impact of foreign exchange and are behind double-digit inflation.

Among the main items on the list of increases are fuels, since the adjustments applied by Petrobras follow the exchange variation and the price of oil.

Gasoline and diesel oil have a high power to spread inflation because they affect the freight costs of goods. Airline tickets are also part of the transport sector, which reacts to exchange rates due to fuel.

In addition, electricity became more expensive, because it was necessary to increase the use of thermal plants in a year marked by drought and reduced production at hydroelectric plants.

The exchange rate, currently above R$ 5, was more pressured amidst the political crisis involving the Jair Bolsonaro (non-party) government.

This turmoil gained a new chapter in the final stretch of October, after the Planalto Palace decided to circumvent the spending ceiling to support Auxílio Brasil, the replacement for Bolsa Família.

Some economists are concerned about the direction of public accounts, as fiscal uncertainty could drive investors away from the country, leaving the real devalued against the dollar.

According to the IBGE, the IPCA of 10.67%, in the 12-month period to October, is the highest since January 2016. At the time, the official inflation index reached 10.71%.

This rate was registered amidst the political crisis faced by former president Dilma Rousseff (PT), whose impeachment process was confirmed in August of that year.

According to analysts, inflation gained strength between 2015 and 2016 due to a combination of factors. In 2015, there was pressure from the readjustments of administered prices, such as electricity and gasoline.

With the political turmoil, the dollar also strengthened against the real. In 2015 alone, the American currency rose almost 50%, to close to R$ 4.

The situation spilled over into the prices of items such as food, also influenced by adverse weather conditions in part of the country.

Before the economic crisis of 2015 and 2016, the other big inflationary shock of this century occurred in the passage from 2002 to 2003, in the wake of the electoral campaign that would lead Luiz Inácio Lula da Silva (PT) to the presidency.

In May 2003, with the PT member already in Planalto, the IPCA reached 17.24% in 12 months, according to IBGE. It is the highest rate accumulated in this century, since 2001.

Again, the tensions coming from the political area, and the reflex on the exchange rate, helped to push prices up.

During the 2002 election campaign, the market showed nervousness with the possibility of Lula’s victory and the direction of the national economy, which led the dollar to rise more than 50% that year.

However, throughout the PT’s first term in office, the American currency had a truce, and inflation lost momentum, returning to single digits.

“The tone of the three price shocks [2003, 2016 e 2021] it is a result of cost inflation, driven in part by the high exchange rate”, says Peçanha, from FGV Ibre.

“The exchange rate generates a very important cost, because it has a great effect on domestic prices, whether because it makes inputs or even final goods more expensive. It has a generalized impact”, he adds.

Alexandre Espirito Santo, economist at Órama and professor at Ibmec-RJ, takes the same line.

According to him, the political tension and the reflex on the dollar provoke a kind of vicious circle in the economy, by affecting investors’ expectations, exchange rate, interest and, consequently, final prices.

This, he says, was felt to a greater or lesser extent during the most recent inflationary shocks.

In the economist’s view, the pressure on prices in Brazil may lose strength in 2022 in the event of an improvement in the water situation and an eventual truce in oil prices.

The scenario, however, remains with cause for concern, points out the professor.

In this sense, he recalls that the rise in prices in 2021 should also generate reflexes in 2022, with the possibility of contract readjustments based on inflation accumulated in previous months.

“We have a lot of risks, and inflationary inertia is a huge threat, difficult to break. The central bank needs to be vigilant.”

Pedro Kislanov, manager of the IPCA survey, also assesses that the three periods of most consistent inflation in this century are similar to each other. Among them is the exchange rate impact, which today affects items such as fuel and food.

According to IPCA data, the lowest inflation rate of the 21st century, in the accumulated of 12 months, was registered in May 2020: 1.88%.

At the time, Brazil was going through the initial phase of the pandemic, which caused a series of restrictions on economic activities and shook the consumption of non-essential goods and services, recalls Kislanov.

Oil, for example, plummeted on the international market after the arrival of Covid-19. Recovery followed, with the reopening of the economy.