Inflation is Back!?
By Carlos Eduardo de Athayde Guimarães
For those who remember the 1980s, it wasn’t just about wacky colored hairdos, checkered clothes and ”new wave”. Inflation in Brazil was through the roof at more than 2,000 percent per year. Several changes in the currency and economic plans tried to quell the “dragon” of inflation.
Finally in 1994, the “Real Plan” drew inflation back to more civilized single digit level, though at a cost: one of the highest interest rates in the world and an extremely overvalued real. This “inflation targeting” aimed for an average inflation rate of 4.5% of the IPCA, which in recent years has been achieved.
What’s the story today? Is the new administration creating inflation? With the significant expansion of the GDP in 2010 and the inclusion of the lower classes in the consumer market, consumer demand increased in 2011 and a 4.29% growth in GDP is expected in 2011. Under this scenario, inflationary pressures will appear.
In plain English, inflation, or rising prices, has a large psychological component. Put simply: People raise prices because others can and do too, when there’s someone willing to pay. The culprit is uncontrolled spending. Therefore, our best bet against rising inflation is to stop buying!
Carlos Eduardo de Athayde Guimarães has a Master’s Degree in Finance. He can be contacted at: economy@curitibainenglish.com.br.
