How did Brazil’s inflation rate get so low?

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How did Brazil’s inflation rate get so low?

Food prices pushed Brazil’s inflation rate down. Photo: Marcelo Camargo/ABr

The Brazilian government has announced the IPCA price index, which measures the official inflation rate, for 2017: +2.95 percent. It is the lowest rate since 1998, a year during which prices went up by only 1.65 percent. The 2017 results are so low that, for the first time in history, the inflation was below the official target range of 4.5 percent, plus or minus 1.5 percent.

Central Bank President Ilan Goldfajn rushed to say that Brazil’s latest super harvests were the deciding factor, since they caused deflation in food products. However, we can’t explain an 8 percent drop in inflation between 2015 and 2017 as the result of one single factor.

To understand the 2017 inflation rate, we need first to understand the 2015 rate, which amounted to 10.67 percent. Prior to the 2014 election, the Dilma Rousseff administration had been artificially controlling prices of fuel and electricity. After winning her bid for a second term, the president readjusted prices, which then spiked by 18 percent in 2015. It accounted for one-quarter of that year’s inflation.

After 2015, fuel and energy prices stopped climbing so fast, thus lowering their inflationary pressure. The recession also played into the equation: with less money available, people drastically reduced consumption, which stopped companies from raising their prices.

How Brazil’s inflation rate is calculated

The IPCA price index is based on the prices of over 400 products, split into nine categories. How much each group of products weighs into the equation depends on how the Brazilian Institute of Geography and Statistics (IBGE) interprets the average consumption behavior of Brazilian families.

Historically, expenses with food products, housing, and transportation are the most important. That’s why these groups can push inflation rates up or down so directly. In 2015, food products spiked and were responsible for roughly one-third of that year’s inflation (i.e. 3 of 10.67 percent). It means that the rise in food prices in 2015 was higher than the entire inflation rate for 2017.

Two years later, however, this group had a different effect. Food prices were down by 4.8 percent, which meant a 0.48 percent reduction in the IPCA index. Without considering food and beverage, inflation would have finished 2017 at 3.43 percent. When taking them into account, however, the rate goes down to 2.95 percent.

Growth again?

In 2017, the Brazilian economy grew by an estimated 1 percent. Though not a jaw-dropping result, it nonetheless represents a major improvement from a 7 percent shrinking over the previous two years. That growth was possible thanks to a lower inflation rate.

With a lower inflation rate, the Central Bank was able to lower the Selic basic interest rate – which is now at 7 percent per year – a record low. It allowed cash-strapped families to balance their budgets and consume again. The World Bank predicts a 2 percent growth rate for 2018.

What got cheaper/more expensive?

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