Inflation, which reached 10.25% in the accumulated in one year, is one of the main problems of the Brazilian economy. High prices are widespread, reducing the purchasing power of money and leaving the population poorer. But the assessment that the government has made is that this is an almost inevitable situation. Last week, in his live on Thursdays, the president Jair Bolsonaro he said that inflation is a global problem and called on those who criticize him to present solutions.
The request came together with the attempt to relativize the famine facing the country. Armed with an extensive list – from basic foods to toilet paper -, it showed that Americans pay more for potatoes, soy oil, meat, for example, than Brazilians. “Are you complaining that it’s high here? There it is too. This crisis is worldwide. It’s not just in Brazil,” he said, while blaming the “stay at home” policy adopted by governors and mayors to contain the pandemic for the soaring inflation.
This Tuesday, 12, in an interview with CNN in the United States, Economy Minister Paulo Guedes also stated that the problem of inflation is global, and that in Brazil half of the rise in prices is concentrated in energy and food.
Indeed, there is an overall increase in inflation. But the situation is much worse in Brazil. While the 12-month accumulated price increase here is more than double digits, in the G-20 countries this number is 4.5%. In the 38 countries that are part of the Organization for Economic Cooperation and Development (OECD) the average number is even lower: 4.3%.
O state he heard six economists responding to Bolsonaro’s request to point out ways out of the inflation problem. For them, the government had a fundamental role in this scenario of uncontrolled prices and also has a fundamental role in the return to normality. Mainly by handling public accounts responsibly.
Below, see the recipes of economists to try to solve the problem of inflation in the country.
Government is largely to blame for inflation
First of all, it is worth remembering that the central bank is alone in fighting inflation. The country is going through a stagflation process with 18% inflation projected from 2020 to 2022 and a drop in Gross Domestic Product (GDP) per capita in the order of 1.3% in the same period. THE pandemic it caused important impacts on the economy and the way out involves controlling inflation together with conditions for growth.
For this, nothing better than the government to radically change its economic policy, focusing on relevant and specific reforms: joining the PEC 45 and the PEC 110 of the tax reform of goods and services, with discussions already advanced in both houses; abandoning the Income Tax reform as it currently stands; forward the regulation of article 41 of the Constitution, which deals with the periodic evaluation of the performance of public servants. This would help growth and productivity and reverse part of the exchange rate depreciation. Furthermore, the government should have signaled to the population an adjustment in energy consumption, which could have reduced the need to increase tariffs to the level reached. None of this will happen, however, and the culprit will remain the government.
*He is chief economist at MB Associados
Combating inflation involves a commitment to the spending ceiling
The best action to combat inflation currently available to the president would be to reinforce his commitment to the spending ceiling constitutional, after the necessary modification to accommodate the court-ordered payments next year. This would imply limiting the increase of social programs to the open space under the roof in accordance with the current content of the PEC in progress in the Chamber.
Returning predictability to government accounts until the elections would likely cause the real to appreciate significantly, automatically lowering the price of products that are quoted in dollars (fuels, much of food and other industrialized goods) and alleviating inflation. The current dollar price of a barrel of oil (about US$83) is at the same level as in September 2018; Today we only have the most expensive gasoline in history because the exchange rate, which was R$ 4.05 per dollar at the time, is now R$ 5.50, largely due to the political and fiscal turmoil caused by the government itself. .
Another benefit of this action would be to facilitate the Central Bank’s task of controlling inflation expectations for 2022 and 2023. With a more appreciated exchange rate and the maintenance of the fiscal regime, the BC could raise the Selic rate less, which would contribute to a lower cost debt rollover and, in the eyes of the market, less probability of an inflationary outflow for the payment of the bonds.
*Chief economist at Neo Investimentos
Inflation: a lot could have been done
The surprise has been negative when talking about inflation in the main economies of the world and especially in Brazil. There are elements that are common to the countries, but there are domestic factors that increase inflation, generating important costs for Brazilian society, especially in the lower income segments. Much could have been done to avoid this picture.
Part of this inflation stems from the pandemic and its effects. In Brazil, there are specific elements that boost inflation: climate issues (drought and frost) and high risk perception in light of the fiscal and political/institutional framework.
The distrust in relation to the sustainability of public accounts and the maintenance of the rules of the game from the institutional point of view increase the risk perception of economic agents and, consequently, affect the pricing of financial assets, such as the exchange rate. Through the exchange channel, the increase in prices is magnified in the domestic market.
The real has remained detached from its main fundamentals. The explanation is that there is a risk component that markets embed in pricing that is not being captured by the models. In other words, with signs and measures of responsibility in conducting public accounts and respecting the rules of the institutional game, a good part of inflation could have been avoided.
*Economist and partner at Tendências Consultoria
Central Bank needs to raise Selic above neutral level
The most efficient way to fight inflation, in my view, is the conventional monetary policy, that is, raising interest rates above the neutral level to deflate the inflation that is above the target. In this sense, it is extremely important for the Central Bank to ensure the control of inflation expectations to prevent the inertial mechanisms present in the Brazilian economy from perpetuating higher inflation.
It is true that the Brazilian economy faces a large number of cost shocks: food, fuel, energy and other inputs (as well as in other regions of the world), but as much as it is not appropriate to combat the primary impact of these supply shocks, it is up to BC prevent the side effects of these shocks from appearing.
Persistent services and core inflation suggest that the secondary effects of primary shocks are occurring and demand that the monetary authority raise interest rates to a level above neutral. The BC has suggested that the appropriate base interest level would be significantly contractionary, which in our view implies interest rates above the base scenario of 8.5%.
We believe that the Selic will go to 9.5% to combat the secondary effects of shocks, inertia and promote economic disinflation and return to the trajectory of inflation targets. We do not believe in supply-side policies to fight inflation, namely: tax cuts, price controls and/or reductions and/or freezing of administered prices. These measures have already been taken in the past and have proved to be ineffective, counterproductive, in addition to having contributed to unanchoring expectations, so fundamental in an inflation targeting regime.
*Chief economist at Armor Capital
With political and fiscal uncertainties, price shock was ‘doubled’ in Brazil
Luiz Fernando Figueiredo* and Rafael Ihara**
One of the main factors that pressures inflation is the rise of the dollar, mainly due to the rise of commodities. When they rise in the international market, the currency appreciates as a consequence, which reduces the inflationary effects. This was not the case with Brazil, on the contrary, due to political, institutional, but mainly fiscal uncertainties, this price shock was “doubled”.
A significant part of our currency’s depreciation is related to a premium charged by investors to offset these political and fiscal risks. In relation to the fiscal, the government must signal policies compatible with a fall in public indebtedness, avoiding electoral populism with unsustainable aid. As for the political, there must be clarity regarding the rules of the game and institutions that guarantee the functioning of democracy, ruptures should be totally out of the question.
In addition, a clear agenda of macro and microeconomic reforms is essential to raise the country’s growth rate and, consequently, attract capital flows, which contribute to exchange appreciation. This process associated with a vigilant and firm Central Bank, as has been the case, are significant responses to this excess of shocks and very high inflation.
*CEO of Mauá and Chief Economist of Mauá
**Mauá’s Chief Economist.