RIO – Although the analysts heard by state have divergences in their projections about the duration and intensity of inflation in the coming months, most converge to the finding that the Brazil, for decades, has lived in a context conducive to stagflation. “Brazil is in a situation of ‘stagflation‘ long time. The economy can’t grow, but inflation happens,” says the chief economist at the Austin Rating risk agency, Alex Agostini.
He supports his observation by citing that, in the last ten years, from 2012 to 2021, the average annual growth of the GDP should be 0.4%, and the inflation annual will be at 5.9% by the IPCA.
According to the Brand New Economics Dictionary, organized by Paulo Sandroni, “stagflation” is a “situation” that occurs in the economy, when “stagnation or a decline in the level of production and employment are combined with an accelerated inflation”. It is an atypical picture, different from the “normal” functioning of economies, as described by classical economic theory.
The typical operation assumes that the price dynamics involves, mainly, the game between supply and demand. When the economy grows, jobs are generated and demand heats up, favoring price adjustments and inflation. When the economy shrinks or grows very little, unemployment rises and demand cools, dampening inflation. Central banks set their base rates mainly to act on demand – more low-interest credit stimulates demand, less high-interest credit produces the opposite effect. Several other factors, such as expectations and indexation, act on price dynamics, but a stagnant economy should not have inflation.
“Stagflation” is not a theoretical concept. In the most recurrent explanation, the term was coined by British parliamentarian and former minister Iain Macloed, at the English Parliament in 1965. The label stuck and became popular in financial markets in the 1970s, because of the oil crises.
When the main producing countries of the Middle East organized to control the supply of Petroleum, prices soared. It was an unexpected supply shock, with unusual effects on economies. Countries found it difficult to obtain an important input for production – therefore, for economic growth. At the same time, everything that had oil as an input became more expensive, and the readjustments reached the consumer. The result was stagnant growth with rising prices.
Almost half a century later, the Covid-19 it was another unexpected shock. The need to restrict social contact has disorganized the world economy. On the supply side, factories were closed in the first few months, the maritime transport system stalled and cascading production stoppages caused shortages and more expensive components. On the demand side, especially after the initial months, families stopped spending on services and started spending on goods, a movement boosted by income transfer policies in several countries. The combination of restricted supply and high demand results in inflation, even in the Europe it is us USA.
Armando Castelar, coordinator of the area of Applied Economics at the Brazilian Institute of Economics (Ibre/FGV), points out that the current situation is different, for example, from the ‘stagflation’ of the early 1990s, when “there was a detachment: demand could fall, the economy retracted, but inflation continued. We don’t have it now.”
For the economist and consultant Zeina Latif, BC will need help in its work. “Better forwarding the tax issue would reduce the pressure on the dollar. This would alleviate the work of the central bank at monetary policy and, indirectly, in inflationary expectations”, he says.