Fernando Alcoforado*
This article aims to present the strategies that would make it possible to eliminate inflation in Brazil. Inflation is defined as the continuous, persistent and widespread increase in prices in general. Inflation mainly affects the less favored sections of the population, as they have less access to financial instruments to defend themselves from rising prices. Higher inflation also increases the cost of public debt, as interest rates on public debt not only have to offset the effect of inflation, but also have to include a risk premium to compensate for the uncertainties associated with higher inflation. Inflation is presented as one of the scourges that affect the Brazilian population now because it erodes the income of all Brazilians, but it is crueler to those who have less income. For the poorest, increases in electricity, gas, rent, and food prices contribute to their food insecurity to the point that millions of Brazilians wake up not knowing if they will get their next meal. Inflation for the poorest families was 10 times higher than for the richest in 2020. As inflation is a complex phenomenon, many government officials do not understand its causes and do not know how to deal with it, and many economists learn in universities how to fight inflation by adopting measures that do not act effectively on the true causes of the problem.
How does the government control inflation in Brazil? In order to keep inflation under control, the Brazilian government has promoted since 1994, based on the neoliberal economic model, the opening of the national market to imported products to force down domestic prices, as well as adopting the so-called exchange and monetary “anchors”. The exchange rate anchor instituted the exchange rate “bands” regime, with the exchange rate varying between certain limits, which, in practice, sought to lower the cost of imported products to force down domestic prices. In turn, the monetary anchor sought to reduce the volume of money in circulation with the sale of government bonds to avoid their pressure on prices. In addition, the Central Bank of Brazil raises the interest rate to increase the cost of money and the level of compulsory reserves of banks (resources that they are required to “keep away” at the Central Bank) to reduce the volume of money in circulation.
As of 1999, the inflation targeting regime was adopted, in which the monetary authorities undertake to meet targets established for the current and next year. One of the ways of seeking to achieve inflation targets is through the Selic rate, the basic interest rate of the Brazilian economy. By raising interest rates, the government increases the cost of money, reduces the demand for products and services for sale and, consequently, seeks to reduce inflation. This system of controlling inflation by the Brazilian government has been extremely ineffective because, in addition to not effectively controlling inflation because it acts on the symptoms and not on the true causes of the problem, it has been harmful to the national economy by leading the country into recession, falling investments, deindustrialization, rising unemployment and to the increase in public debt. Figure 1 shows the evolution of inflation in Brazil from 2000 to 2021, which shows that the inflation rate was out of control between 2002 and 2004 when it evolved from a rate of 7.5% to reach a rate of 17%, between 2015 and 2016 when it evolved from a rate of 6% to 11% and from 2020 to the present when it evolved from 2% to 11%.
Figure 1- Evolution of inflation based on IPCA (Extended Consumer Price Index) from 2000 to 2021
Source: https://www.dicionariofinanceiro.com/ipca/
Figure 2 shows that the Selic rate showed high values to try to lower inflation, which grew a lot in 2011, 2015 and 2022 (Figure 1).
Figure 2- Evolution of the Selic rate from 2010 to 2022
Source: https://www.poder360.com.br/economia/selic-sobe-para-1275-a-maior-taxa-em-5-anos/
In March 2021, the inflation accumulated in the last 12 months exceeded the target ceiling and did not return. To control inflation, the Central Bank began to increase the basic interest rate in the economy, in an attempt to discourage consumption. The government’s indirect action with the adoption of ineffective exchange rate and monetary policies in the fight against inflation needs to be replaced by the effective direct action of the government on the factors that generate inflation with the adoption of concrete measures to eliminate demand inflation, cost inflation, monetary inflation, inertial inflation and hyperinflation, as described in the next paragraphs.
It is important to note that there are five types of inflation: 1) inflation of demand for goods and services; 2) production cost inflation; 3) monetary inflation; 4) inertial inflation; and, 5) hyperinflation.
Inflation of demand for goods and services
This inflation occurs when the demand for products (increase in consumption) is greater than the country’s production capacity. To deal with the inflation in demand for goods and services, the Brazilian government has adopted measures aimed at cooling demand by increasing the basic interest rate (Selic rate) to make it difficult for the population to access loans and financing and thus reduce consumption. This type of policy has the ability to control inflation, but, on the other hand, contributes to worsening the recessive process in the country, as is currently happening in Brazil with successive increases in the Selic rate. Other measures adopted by the Brazilian government to cool demand for goods and services are those aimed at reducing the amount of currency in circulation in the economy. Generally, this policy is implemented through the sale of public securities held by the Central Bank on the open market, which, however, contributes to the increase in public debt, which is growing vertiginously in Brazil.
It is important to note that Inflation of demand for goods and services is what happens when the increase in demand is greater than the increase in supply, that is, of production, in a given country. This type of inflation is aggravated when governments issue money uncontrollably and do not plan their economies by adopting preventive measures that prevent the imbalance between supply and demand for goods and services in the economy. This situation is occurring now in Brazil because the government, being neoliberal, has stopped planning and intervening in the economy that operates without any feedback and control mechanism. The consequences of the lack of planning in the Brazilian economy are that it functions chaotically without control. If aggregate supply fails to keep pace with the increase in aggregate demand, it will lead to demand inflation. In Brazil, in some sectors, the levels of national production (agricultural, industrial, trade and services) and imported products do not meet national demand, that is, supply is lower than demand, which causes sectorial demand for inflation. This is due to the absence of effective government planning aimed at effectively controlling inflation in Brazil.
How to eliminate demand inflation in Brazil?
What would be the rational way to eliminate demand inflation in Brazil? The Brazilian government should annually plan the national economy to meet the expected demand for agricultural and industrial products, agricultural and industrial raw materials and inputs, and energy, transport and communications services and monitor the evolution of production, demand and prices of agricultural and industrial products, agricultural and industrial raw materials and inputs, and energy, transport and communications services to assess cases with possible imbalances between supply and demand. Identified cases of imbalance between national supply and demand, the government should act to increase the national production of necessary items or import them when necessary. The priority of national production is to meet domestic demand. Only when there is surplus production would they be exported. The government must plan in advance the level of inventory of agricultural and industrial products, of raw materials and agricultural and industrial inputs, and of energy, transport and communications services to avoid their shortage and, consequently, avoid demand inflation. Unfortunately, none of this is done in Brazil.
To eliminate demand inflation, it is therefore necessary to adopt the following economic policies:
• Increase domestic (national) agricultural and industrial production to meet national demand and produce surpluses for export.
• Maintain the level of stocks of agricultural products necessary to avoid shortages and stabilize the prices of agricultural products, many of which are subject to variations in the weather.
• Import agricultural and industrial products when there are no stocks and demand exceeds domestic (national) production.
• Maintain the stock level of raw materials and agricultural and industrial inputs necessary to stabilize their prices.
• Import raw materials and inputs when there are no stocks and demand exceeds domestic (national) production.
Production cost inflation
This inflation occurs when there is an increase in the production costs (machinery, raw material, labor) of the products. Production cost inflation occurs when demand in a given economy remains constant, but the costs of agricultural, industrial, trade, and service production rise. This type of inflation can be generated by the increase in any of the production costs such as wages, raw materials, inputs or taxes. With the increase in production costs, the reaction of producers is to increase the price of products and services, which is higher for the final consumer. Therefore, in this scenario, the country’s economy will face cost inflation. To deal with cost inflation, the Brazilian government has been ineffective in fighting it because, being neoliberal, it does not interfere in the sense of avoiding that production costs of the agricultural, industrial, trade and services sectors rise. The only possible measure adopted by the Brazilian government to contain this type of inflation is the reduction of taxes with the worsening of the government’s fiscal situation.
How to eliminate production cost inflation in Brazil?
What would be the rational way to eliminate production cost inflation in Brazil? To eliminate production cost inflation, the Brazilian government should monitor the evolution of the prices of wages, raw materials and inputs to adopt measures that contribute to prevent its increase, as well as encourage increased productivity in agricultural, industrial, trade and services. The Brazilian government does nothing in this sense except to reduce some taxes.
It is worth noting that production cost inflation in Brazil is fundamentally the result of the following:
• Increase in agricultural, industrial, commercial and service production costs, which increase due to higher wages, prices of raw materials, inputs, electricity, petroleum products used in production, among others.
• Increase of costs in the supply of electric energy that grow due to climatic factors and of oil derivatives that increase due to the increase in the price of oil in the international market and the variation of the dollar, in the cargo transport service that grow due to the increase in the price of oil derivatives and in the communications service that increase due to the growth in the prices of imported components in general.
• Increase in tax costs (federal, state and municipal) that increase due to the lack of control of public spending.
• Higher raw material and imported input costs incurred in agricultural, industrial, trade and services production, which increase due to the rise in their prices in the international market.
• Increase in the costs of the financial system, which increase due to the increase in the Selic rate by the Central Bank adopted to control inflation and the resulting bank interest.
To eliminate production cost inflation, it is necessary to adopt the following economic policies:
• Increase productivity by improving work processes and using advanced technologies to reduce agricultural, industrial, commercial and service production costs.
• Increase productivity with the improvement of work processes and the use of advanced technologies in the production of raw materials, inputs and energy used in agriculture, industry, commerce and services to reduce their costs.
• Increase the productivity of the labor used in agriculture, industry, commerce and services with the increase of their technical capacity to reduce their costs.
• Plan the national electric system in order to use lower cost electric energy production, transmission and distribution systems.
• Nationalize inefficient electric energy production, transmission and distribution systems.
• Nationalize Petrobras to reduce the prices of oil derivatives in order to serve the interests of the population and the national productive sector and not of private shareholders.
• Plan the cargo transport system with a view to replacing road transport with waterway and rail to reduce transport costs and its dependence on oil derivatives.
• Reduce federal, state and municipal taxes by reducing public spending by eliminating unnecessary bodies and superfluous expenses.
• Increase domestic production of raw materials, inputs and energy to replace imported equivalents to avoid importing foreign inflation and reduce national dependence on foreign countries.
• Avoid the increase in Selic interest rates so that financial costs do not rise and do not result in an increase in the prices of products and services in Brazil.
Monetary inflation
This inflation occurs when there is issuance of currency out of control by the government. This situation has already occurred at various times in the history of Brazil, especially in the second half of the 20th century when the issuance of currency contributed to the hyperinflation of the 1980s and 1990s. It is believed that the increase in money in circulation without the increase in productivity leads to a loss of purchasing power, that is, to an increase in inflation. Monetary inflation is normally the cause of demand inflation.
Inertial inflation
Inertial inflation refers to inflationary memory. That is, current inflation results from the past index added to the expectation of future inflation. This type of inflation bears no relation to an increase in demand or costs in this economy. Therefore, in an economy where prices are automatically readjusted from one period to another, inertial inflation occurs. Brazil has already faced problems in the past with inertial inflation that fueled the inflationary process and contributed to the hyperinflation that took place in the 1980s and 1990s in Brazil. To avoid inertial inflation, it is necessary to avoid price indexation.
Hyperinflation
Hyperinflation is a level of inflation considered to be far above tolerable. In addition to high prices, this scenario tends to generate a strong devaluation of the local currency and can generate economic recession. When an economy reaches hyperinflation, inflation is considered to be out of control. Brazil has already faced the problem of hyperinflation at various times in its history, such as the one that preceded the creation of the Real Plan to stabilize the Brazilian economy in the 1990s.
It is worth noting that, in addition to demand inflation, cost inflation, inertial inflation and hyperinflation, there is also the phenomenon of deflation, which is the inverse effect of inflation on prices. That is, deflation occurs when there is a fall in prices in the economy. Although high inflation is a negative factor, deflation can also have as negative effects as inflation on a country’s economy. Deflation can be generated by increasing supply more than demand. In this case, there is an excess of goods in the economy and producers are driven to lower their prices. However, another fact that can generate deflation is a drop in demand. The drop in demand would generate an effect similar to the increase in supply, there would be more products on the market than buyers with the potential to buy them. A drop in demand and the consequent occurrence of deflation can be one of the first signs of an economic recession. The drop in demand and prices could lead to a drop in production, which in turn would lead to an increase in unemployment.
Based on the above, the control of inflation by the Brazilian government has been extremely ineffective because, in addition to not effectively controlling inflation because it acts on the symptoms and not on the true causes of the problem, it has been harmful to the national economy by leading the country into recession, the fall in investments, deindustrialization, the increase in unemployment and the increase in public debt. The Brazilian government would fight inflation in demand for goods and services by planning the economy together with the productive sector so that national production meets domestic demand for goods and services. Instead, being neoliberal, the government acts indirectly by increasing the basic interest rate (Selic rate) and reducing the amount of currency in circulation in the economy with the sale of public bonds that contribute to aggravating the recessive process in the country and increasing the debt public. The Brazilian government should fight production cost inflation by monitoring the evolution of wages, raw materials and input prices to adopt measures that help to avoid their increase, encourage increased productivity in agricultural, industrial, trade and services production and promote cost reduction in inefficient electric energy and oil production systems with their planning and nationalization and in cargo transport with their planning oriented towards waterway and rail modes. On the contrary, it does nothing to combat production cost inflation because, being neoliberal, it does not interfere with the productive sectors in order to prevent agricultural, industrial, commercial and service production costs from rising.
Therefore, it was demonstrated that the current strategy of the Brazilian government to combat inflation in Brazil is ineffective because it does not effectively control inflation. This means that the neoliberal economic model that has presided over the actions of the Brazilian government in the economy since 1990 needs to be abandoned immediately and replaced by the Keynesian-based national developmentalist model that would make the government play an active role in the planning of the national economy that, with feedback and control mechanisms, would successfully combat demand and cost inflation, avoid hyperinflation and promote national development.
* Fernando Alcoforado, 82, awarded the medal of Engineering Merit of the CONFEA / CREA System, member of the Bahia Academy of Education, the SBPC- Brazilian Society for the Progress of Science and IPB – Polytechnic Institute of Bahia, engineer and doctor in Territorial Planning and Regional Development from the University of Barcelona, university professor and consultant in the areas of strategic planning, business planning, regional planning, urban planning and energy systems, was Advisor to the Vice President of Engineering and Technology at LIGHT S.A. Electric power distribution company from Rio de Janeiro, Strategic Planning Coordinator of CEPED- Bahia Research and Development Center, Undersecretary of Energy of the State of Bahia, Secretary of Planning of Salvador, is author of the books Globalização (Editora Nobel, São Paulo, 1997), De Collor a FHC- O Brasil e a Nova (Des)ordem Mundial (Editora Nobel, São Paulo, 1998), Um Projeto para o Brasil (Editora Nobel, São Paulo, 2000), Os condicionantes do desenvolvimento do Estado da Bahia (Tese de doutorado. Universidade de Barcelona,http://www.tesisenred.net/handle/10803/1944, 2003), Globalização e Desenvolvimento (Editora Nobel, São Paulo, 2006), Bahia- Desenvolvimento do Século XVI ao Século XX e Objetivos Estratégicos na Era Contemporânea (EGBA, Salvador, 2008), The Necessary Conditions of the Economic and Social Development- The Case of the State of Bahia (VDM Verlag Dr. Müller Aktiengesellschaft & Co. KG, Saarbrücken, Germany, 2010), Aquecimento Global e Catástrofe Planetária (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2010), Amazônia Sustentável- Para o progresso do Brasil e combate ao aquecimento global (Viena- Editora e Gráfica, Santa Cruz do Rio Pardo, São Paulo, 2011), Os Fatores Condicionantes do Desenvolvimento Econômico e Social (Editora CRV, Curitiba, 2012), Energia no Mundo e no Brasil- Energia e Mudança Climática Catastrófica no Século XXI (Editora CRV, Curitiba, 2015), As Grandes Revoluções Científicas, Econômicas e Sociais que Mudaram o Mundo (Editora CRV, Curitiba, 2016), A Invenção de um novo Brasil (Editora CRV, Curitiba, 2017), Esquerda x Direita e a sua convergência (Associação Baiana de Imprensa, Salvador, 2018), Como inventar o futuro para mudar o mundo (Editora CRV, Curitiba, 2019) and A humanidade ameaçada e as estratégias para sua sobrevivência (Editora Dialética, São Paulo, 2021) .
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