Say Hello to an Old Enemy: Inflation
By Paulo Kubis
Inflation talks are back. The fears of inflation have returned. After the 2008 crisis, economies everywhere received a boost. The economic growth experienced around the world since then has come through lower interest rates, a lot of emergency measures, and governments spending in an effort to keep the giant economic wheels turning. These measures, however, which aimed to keep the global economy from falling even more in the crisis downturn have had consequences.
The most common outcome of a forced recovery is a pressure on prices. Generally, in times of economic turmoil, economies are flooded with money. Policy makers do this in an attempt to discourage savings and ignite consumer spending. This is what generates demand for production and services and generates jobs, which create income and translate into more spending. However, this sudden rise in demand tends to force prices up, causing hikes in inflation.
In Brazil and in many other developing countries, inflation is well known. Most Brazilians still remember the hyperinflation scenario experienced before the creation of the real. Just to have an idea of how important inflation is, the Brazilian economic system is built up around an “Inflation Targeting System”. This means that the success or failure of the country’s economic policy is mainly measured by whether inflation is within the set of targeted boundaries. In Brazil, this target is 4.5% a year, with a tolerance of 2% in either direction. In 2010, inflation hit 5.9% (IPCA Index), just barely inside the target. In 2011, inflation worries are back, and the government has taken a number of measures trying to slow the economy down as a way of lowering inflation. Among other measures, this includes hikes in interest rates.
In summary, the government is attempting to make consumption more difficult and thereby slow inflation a little, which is exactly the opposite of what we saw during the aftermath of the 2008 crisis. Today, borrowing money, especially to consume, is getting more expensive.
All of this may not be the subject for an everyday conversation. However, it does impact our day-to-day lives. Times like this are best for encouraging savings because being on the other side of the interest math is becoming more and more difficult. So, in 2012, weigh your consuming needs, and try your best to receive and not pay interest (save/invest). If you have not thought about it, this may be the time.
Paulo Kubis is a certified Investments Agent, who majored in Business Administration and minored in Economics at the University of Science and Arts of Oklahoma (USA), and specialized in Capital Markets at FAE Business School. Questions or comments: seudinheiroevoce@gmail.com.
