Brazil’s inflation is on the rise. When will it return to normal?

. Jul 16, 2018
inflation supply crisis brazil The supply crisis of May pushed Brazil's inflation up
inflation supply crisis brazil

The supply crisis of May pushed Brazil’s inflation up

Brazil experienced, in June 2018, its highest monthly inflation since January 2016. When we consider the rate only for months of June, it was the biggest spike since 1995 – and the second-highest in the history of the Brazilian Real, a currency created back in 1994.

June is traditionally a month of low inflation in Brazil. Prices tend to go down over the first half of the year, rising only as the Christmas season approaches. Last year, for example, prices actually went down in June, as the inflation rate was -0.23 percent. This time around, though, the National Consumer Price Index – Extended (IPCA) was up by 1.26 percent. 

brazil inflation

In 2015, Brazil couldn&#8217;t keep the inflation rate within the target band of 2.5 &#8211; 6.5 percent. Instead, the rate was at 10.67 percent. Since then, inflation had been tamed, and even came in below the target band at certain points. Now, June results represent the biggest rise of the IPCA index since January 2016, when the inflation rate accumulated over the previous 12 months was 10.7 percent.</span></p> <p><span style="font-weight: 400;">These </span><a href=""><span style="font-weight: 400;">atypical price rises</span></a><span style="font-weight: 400;"> occurred due to a number of factors, among which is the </span><a href=""><span style="font-weight: 400;">truckers&#8217; strike</span></a><span style="font-weight: 400;"> that paralyzed Brazil over 11 days in late May. The strike caused fuel and food shortages in many regions of the country, exposed infrastructure deficiencies, and provoked billion-dollar losses for the </span><a href=""><span style="font-weight: 400;">agribusiness sector</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">Another factor is the rise of the U.S. Dollar against the Brazilian Real. For the consumer, the effects of a stronger U.S. Dollar in Brazil are somewhat indirect, as it affects raw materials for Brazilian industry. It also pushes oil prices up, thus inflating fuel prices in Brazil. Between July 2017 and May 2018, diesel users grappled with a </span><a href=""><span style="font-weight: 400;">21-percent price hike</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">As a matter of fact, a recent study by Credit Suisse states that, if the BRL loses 10 percent of its value against the USD, inflation rates will rise by 0.44 percentage points. </span></p> <p><span style="font-weight: 400;">A third major factor pushing the inflation rate up are increased electricity costs. Brazil depends heavily on hydroelectric plants, but water levels in most dams are below the average, and power producers have been forced to recur to thermal power stations, which are more expensive, to meet their supply obligations.</span></p> <p><span style="font-weight: 400;">Together, food, housing (which includes electricity), and transportation are responsible for 93 percent of June&#8217;s price bumps. </span></p> <h2>What happens now?</h2> <p><span style="font-weight: 400;">The crisis generated by the truckers&#8217; strike has left a mark and agribusiness lost billions of dollars. Without receiving feed, millions of chickens and pork died. As roads were blocked by truckers on strike, milk producers poured out millions of liters that couldn&#8217;t be transported. That explains why milk and poultry are, on average, 20 percent more expensive than they were before the strike. It will take at least two to three months before producers can normalize their supply.</span></p> <p><span style="font-weight: 400;">Experts have predicted a steep fall of the monthly inflation rate for July, as prices slowly get back to normal. </span></p> <p><span style="font-weight: 400;">With the 1.26 percent bump, Brazil&#8217;s inflation over the last 12 months jumped from 2.86 to 4.39 percent, but remain below the 4.5 percent target set by the Central Bank. Projections by Fundação Getulio Vargas, a </span><a href=""><span style="font-weight: 400;">think tank</span></a><span style="font-weight: 400;">, had predicted Brazil&#8217;s inflation rate for 2018 to be at 3.3 percent. With the truckers&#8217; strike, the projection went up to somewhere between 4 and 4.2 percent.</span></p> <hr /> <h3><img loading="lazy" class="alignnone size-large wp-image-6010" src="" alt="brazil inflation 12 months" width="1024" height="683" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></h3> <hr /> <h2>Inflation: the specter of Brazil&#8217;s past</h2> <p><span style="font-weight: 400;">Brazilians over 40 cringe at the sight of a rising inflation rate, having experienced the country&#8217;s &#8220;lost decade&#8221; of the 1980s. </span></p> <p><span style="font-weight: 400;">International interest rates caused Brazil&#8217;s already enormous debt to grow even larger. Prices were readjusted daily – some even several times a day. Brazilians who were adults at the time remember that some supermarket products were more expensive late in the afternoon than they had been that same morning. Inflation rates <a href="">reached</a> 80 percent </span><i><span style="font-weight: 400;">per month</span></i><span style="font-weight: 400;">. </span></p> <p><span style="font-weight: 400;">Between 1986 and 1993, Brazil changed its currency five times. That’s one of the reasons why Brazilians have the habit of shopping for their groceries monthly – a behavior that’s currently changing – and why we care so little for coins. Cents were worthless for decades.</span></p> <p><span style="font-weight: 400;">Fortunately, though, these days of hyperinflation seem to be gone.

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