Inflation once again crossed the double-digit mark in Brazil in 2021, something that has not happened since 2015.
According to data released by the IBGE (Brazilian Institute of Geography and Statistics) this Tuesday (11), between January and December of last year, the IPCA (Broad Consumer Price Index) reached 10.06%.
The country is far from the only one facing a problem of widespread price increases. In the United States, Europe and Latin America itself, central banks —who are usually tasked with trying to contain inflation using the interest rate mechanism— have seen inflation indicators grow much more than they imagined.
In Brazil, however, domestic factors added to external drivers and contributed to the country registering one of the highest inflations in the region.
Taking into account the 11 largest economies in Latin America, Brazil is only behind Argentina and Venezuela, two countries that are going through deep crises and that go far beyond the problems brought about by the Covid-19 pandemic and its repercussions. In Argentina, inflation reached 51.2% in the 12 months through November; in Venezuela, it hit an impressive 2,700%, according to the IMF (National Monetary Fund) projection for 2021 closed.
When Caribbean countries are included, according to the database with information from 34 nations made available by ECLAC (Economic Commission for Latin America and the Caribbean), in addition to Argentina and Venezuela, Brazil is only surpassed by Cuba, which has bitter inflation. higher than 70%, and by Haiti, plunged into crisis, which registers an index close to 20% in the accumulated in 12 months.
BBC News Brasil spoke with economists who follow the region’s indicators to understand the reasons.
Devalued currencies and rising commodities
Chile, Colombia, Mexico, Paraguay, Peru, all registered a significant increase in price indices last year.
Uruguay has seen inflation recede compared to 2020, but it remains at an uncomfortable level, above the 7% tolerance limit set by the country’s central bank.
The exceptions are Ecuador and Bolivia, where prices rose by less than 2% last year, but these are special cases. Both countries have a dollarized economy, with a fixed exchange rate regime — a policy that helps to contain inflation, but that also takes its toll, including the requirement for a high level of reserves and the risk of imbalance in the trade balance, with loss of export competitiveness.
And apart from the pair, virtually all countries in the region saw their currencies lose value against the dollar in 2021.
Part of this movement was due to internal factors, such as the turbulent elections in Chile and the political and institutional crisis in Brazil. It is not by chance that the Chilean peso was the currency that lost the most value in the region in 2021 and the real is the longest depreciated currency on the continent – since April 2020 the dollar has remained persistently above R$5 here.
In addition to the particularities of each country, global conditions also favored the devaluation of Latin American currencies. One was the rise in interest rates in the United States — which was faced with the need to raise rates because it also began to deal with a problem of rising inflation. With higher interest rates in the US, investors in general tend to migrate to markets considered safer and take money from those considered more risky, such as emerging markets.
Alone, currency devaluation by itself tends to put pressure on inflation. Last year, however, it joined another component, the global rise in commodity prices. Partly due to the resumption of activities in several regions with the advance of vaccination, oil, iron ore, soybeans, corn, meat, oranges, coffee and other commodities saw their prices rise on stock exchanges around the world.
In the assessment of Felipe Camargo, economist for Latin America at the British consultancy Oxford Economics, much of the inflation that hit Latin America in 2021 came from the combination of these two factors.
“That’s what we’re calling [em nossos relatórios] of ‘imported inflation'”, says the economist.
And there are two main channels for transmitting this “imported inflation” to domestic prices in each country. The first, more intuitive, is the pass-through of costs: the local producer starts to buy more expensive input (because he has to import, for example) and passes this cost on to the consumer.
The second is due to the incentive that the exchange rate generates for exporters, explains Camargo. As it is financially quite advantageous to export, producers often prefer to sell abroad rather than domestically, which helps to push up domestic prices as supply decreases.
Another factor that also played a role in bringing more inflation to Latin America (and many other countries) in 2021, adds Alberto Ramos, Goldman Sachs’ chief economist for Latin America, was disruptions in global supply chains.
This was another effect of the faster recovery than expected, translated into the lack of components for the industry and the problems of lack of containers for transporting goods, especially affecting industrial costs.
In Brazil, drought and dollar even more expensive
In the specific case of Brazil, both economists cite a fourth component that added to the exchange rate devaluation, the increase in commodities and logistical bottlenecks: the water crisis, which put pressure on two important groups, electricity and food.
Thus, the combination of factors ended up generating what, in Camargo’s assessment, was described as the worst situation in the region. “Brazil’s inflation was the one that most deviated from the target”, he points out, referring to the inflation target determined by the Central Bank, of 3.75%, with a tolerance of 1.5 percentage points up or down.
“It was the one that suffered the most shocks: the worst exchange rate depreciation, which came before and lasted longer, and the biggest supply shock, because of the water and energy crisis”, he adds.
Looking specifically at the exchange rate, which is a factor of concern for Brazil, the economist places Colombia and Chile next to the country in the list of the worst placed in the region.
The Chilean peso, he points out, even suffered a greater devaluation than the real in 2021, due to the turmoil of its electoral race and the discussions about the new Constitution (last year, Chileans elected the parliamentarians who will write the new Charter, which must be presented in the second half of 2022).
Ramos, from Goldman Sachs, highlights the role of domestic issues in the Brazilian case, which he considers fundamental to understanding why the country had one of the worst performances in the region.
The “political noise”, the result of tensions between the Executive, the Judiciary and the Legislature, and its institutional and economic consequences, points out the economist, ended up creating a “disenchantment” with Brazil among investors, who began to look for other markets and increased the outflow of dollars from the country.
This picture helps to explain why the American currency went from R$5 in April 2020 and has practically not dropped from that level since then.
Also contributing to the “disenchantment”, adds the economist, were the strong slowdown in growth, the lack of reforms and signs of government disengagement with public accounts, including the PEC of Precatórios and the maneuvers to circumvent the spending ceiling.
“It’s hard to see a bright side today,” he says.
Among other reasons, he cites the elections, which are shaping up to be quite turbulent and, unlike neighboring Colombia, which will choose a new president in May, will only be held in October.
Until then, it is unlikely that reforms will resume, says Ramos. The base case is that a high level of uncertainty is maintained, which affects consumers’ decisions to spend and companies to invest.
“An optimist today [em relação ao Brasil] is an ill-informed pessimist”, he concludes.