The risks for inertial inflation in Brazil

Consumer prices rose faster in Brazil last year than at any point since 2015, when the country faced the peak of what was, at the time, its worst recession on record. The official inflation rate sat at 0.73 percent in December and 10.06 percent for the full year. Inflation was not only above expectations, but widespread, with three in four products surveyed becoming more expensive over the course of 2021.

For 2022, economists agree that price hikes should slow down — but it might not be the “short-lived” inflation many were expecting earlier in the pandemic. Weather conditions have disrupted key crops in Brazil’s South, while the encroaching electoral season will bring much economic uncertainty.

Furthermore, in early 2022, Brazil is expected to be hit by so-called “inertial inflation,” by which rising consumer prices cause even more inflation.

In Brazil, items such as rental contracts and pension benefits are indexed to inflation — as they increase, so does the inflationary pressure. “It is hard to see the 2022 inflation rate remaining within the government’s [2 to 5 percent] target band,” Fábio Romão, from consultancy firm LCA, tells The Brazilian Report.

As a matter of fact, Credit Suisse estimates inertial inflation to be responsible for 50 percent of the 2021 rise in...