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Econ 3540 Tammy Reque Brazil, Inflation and Tomatoes The most famous inflationary scenario in Brazil is the

1994 crisis, which was the fuse of the hyperinflation in the 1980s. That situation was interrupted by the creation of the Real Plan which replaced the currency to Real (R$) in order to optimize the inflation. Today, almost 20 years after the implementation of the Real Plan, inflation starts to become a concern again. It reached its peak in March 2013, when the 6,6% inflation rate increased in 120% the price of tomatoes, compared to the same period of time of the year before. Because of the crisis that happened two decades ago, when the price raise of some products got up to 2.500%, inflation is a sensitive topic in Brazil. Today the inflation rate is 6,5% and is controlled by the Banco Central (Central Bank) through monetary policies. Banco Central regulations are aimed to achieve the annual inflation goals; this year the goal is 4,5% rate but the Economic Department of the United Nations anticipates the year to end around 5,8%. This means that the inflation rate will be above the world and most emergent countries average. In less than 2 years, it is the second time that the inflation rate exceeds the governments tolerable limit. Inflation in Brazil refers to the inflation based off the consumer price index (CPI) and can be determined by the percentage of the CPI rate of a specific period compared to the same rate in a previous period. According to the IMF (International Monetary Fund) the inflation in Brazil has been increasing due to the capacity restrictions in some sectors and devaluation of the currency. For example, the proximate cause of the price raise in food is the climatic conditions the drought in the United States increased the price of grains and the drought in the Northeast of Brazil and the Southern rains

also affected the food prices in the domestic market. The drought in Brazil caused the decline in the production of manioc and the price of the flour raised 151% in the last year. There are also ultimate causes related to the inflation, such as structural problems and recent turnarounds of the economy. The economist Alessandra Ribeiro, specialist in inflation, explains that in the last couple of years, the job market went through a lot of important improvements and the unemployment rate has been declining. Parallel to that, because of the labor deficit, the wages increased, and this increase contributed to the acceleration of consumption. This situation can be illustrated by the Phillips Curve. In macroeconomics, the Phillips curve represents the trade-off relation between inflation and unemployment that allows it to be analyzed in the short-term. According to this theory, the lower the unemployment rate the higher will be the inflation growth rate. This inverse relationship between inflation and unemployment can be observed when the inflation is above expectations. Alessandra also explained that the problem is that when demand increased, the production declined as well as the level of investment (to amplify the productive capacity). With more people consuming and less products available, the instability is inevitable and reflects in the prices. The inflation is bad for the country because the price raise limits the purchasing power and the lower classes become more vulnerable to debt. Samy Dana, professor of Economics at FGV-SP says that this situation creates uncertainty for the investors because once they are suspicious about the economic course of the country, they suspend or postpone investments, decelerating growth. When investors stop investing in Brazil, theyll put their money in other emergent countries, compromising even more the economy causing unemployment to rise. According to Alexandre Tombini, Banco Central president, the raise in the SELIC rate (basic interest rate) and the smooth decline in food prices should avoid that the inflation goes out of control.

He affirms that what the Central Bank is doing is compatible with the gradual recovery of the economy. The fight against the inflation strengthens the trust in the economy and at the same protects the workers income. One of the recent strategies by the government to bring down inflation was tax relief for a period of time. For example last year, the taxes over cars and other industrialized products went down significantly. It was not a surprise though that this measure didnt necessarily reduce the price of goods. Although taxes over the products were lower, the profit margin from the companies continued high. Two years ago, the early signs of a rise in the inflation rate caused the Banco Central to forcibly reduce interest rates. Although the 2011 budgetary and monetary policies of the Brazilian government were supportive of a progressive economic comeback, the inefficiency of the short term policies has been harmful to Brazils economy. Today, there are contradictory opinions about what should be Brazils next move to optimize the economy and lower its inflation rate. The most conventional solution is to fix the bureaucratic structures of the Brazilian economy, also known as Custo Brasil (Brazil Cost), which would affect directly the price reduction.