Market economists, usually inflation hawks, enjoy paraphrasing Milton Friedman’s famous line about government programs, saying that “nothing is so permanent as temporary inflation.” This credo finds significant purchase in Brazil, with its long history of volatile consumer prices and indexation. Latest data shows 12-month inflation running above 8 percent, boosted by the demand shock that followed the first wave of the coronavirus pandemic.
And year-end market expectations point toward some undesirable stickiness, with yearly inflation in December tipped to reach 6 percent, above the Brazilian Central Bank’s 5.25 percent tolerance interval.
The monetary authority’s claims of “temporary shocks” have been challenged recently, with 2022 forecasts also on the rise and the short-end of the yield curve trading far above the official guidance, by which raising the overnight policy rate to 6.5 percent — currently at 4.25 percent, from an all-time low of 2 percent — would be enough to deliver next year’s inflation right on target.
Brazilians’ pockets bearing the brunt of the crisis
Beyond the pandemic hardship, Brazilian consumers are stuck...