The announcement of high rate of inflation of 2012 that reached 5.84% (above Central Bank target of 4.5% +/- 2%) with nearly 1% growth in GDP, was a shock for Brazilians as well as government of Dilma, including Mr. Mantega, the finance minister.
“This tolerance about inflation means industrial costs and other costs are going up and the country is [becoming] increasingly uncompetitive,”
Said Alberto Ramos, an economist at Goldman Sachs to Brazil inflation rate prompts concerns.
What effects Brazilian economy inflation?
According to IBGE statistics the influence of the following factors were behind 2012 IPCA (Índice nacional de Preços ao Consumidor Amplo):
- Rice, 36.67%
- Air tickets, 26%
- Cigarettes, 25.48%
- Local Maids, 12.73% (the rise in their salaries)
- Projects’ working force, 11.57% (in salaries)
- Snacks, 11.23%
- Residential rents, 8.95%
- Meals (eating out), 8.59%
- Regular courses, 8.35%
- And health insurance, 7.79%
What the government has to do to motivate its market? purchase power, investments, and industries. Because, the way that government was trying to control inflation, through limiting the price of petrol, reducing electricity bills and taxes on car sales, wasn’t sufficient to shake the market in 2012. Instead, suggested Jonathan Wheatley on Beyond-Brics on FT:
The central bank knows cutting rates won’t have any significant impact on investment and productivity, and so is of little use in stimulating growth – it’s not money that’s lacking, but know-how. Anyway, the bank’s job, were it to do it, is to fight inflation, so a rate hike should be more likely than a cut.
An alternative would be to attack the productivity problem by overhauling the tax system and the public sector. But politicians have got so used to ignoring those challenges they no longer seem to think they exist.