A list of things to understand inflation: key concepts, causes and implications

Definition: Inflation refers to the general increase in prices of goods and services in an economy over time. It erodes the purchasing power of money, meaning that a fixed amount of money can buy fewer goods and services as time goes on. Therefore, inflation erodes the purchasing power of especially the poorest people, who always suffer the most when this happens.

Causes: Inflation can be caused by various factors, including an increase in demand relative to supply (demand-pull inflation), rising production costs (cost-push inflation), changes in the money supply, and expectations of future price increases.

Types of Inflation

Creeping Inflation: Mild and steady inflation over time.

Galloping Inflation: High and accelerating inflation, often leading to economic instability.

Hyperinflation: Extremely rapid and out-of-control inflation, causing the value of money to plummet.

Effects of inflation

Reduces Purchasing Power: People can buy fewer goods and services with the same amount of money.

Interest Rates: Central banks may raise interest rates to curb inflation, affecting borrowing costs and investment decisions.

Income Redistribution: Inflation can impact different groups unevenly, benefiting debtors (as they repay loans with less valuable money) and harming savers.

Uncertainty: High inflation rates can create economic uncertainty and disrupt long-term planning for businesses and individuals.

Measuring Inflation

Consumer Price Index (CPI): Tracks changes in the prices of a basket of goods and services typically purchased by households.

Producer Price Index (PPI): Measures changes in prices received by domestic producers for their goods and services.

GDP Deflator: Calculates the ratio of nominal GDP to real GDP, reflecting overall price changes in an economy.

Controlling Inflation

Monetary Policy: Central banks use tools like adjusting interest rates, open market operations, and reserve requirements to influence inflation.

Fiscal Policy: Governments can influence inflation through taxation, regulation, and spending. In the case of government spending (public investments), for example, if the government stops maintaining a road, this generates future liabilities because there will be greater expenses in its recovery later on. Very often, strict fiscal policies do not consider this rate of infrastructure depreciation, which is a serious error.

Inflation Expectations: Expectations about future inflation can influence current economic behavior, such as wage negotiations, business pricing decisions, and investment choices.

Global Factors: Inflation can be influenced by global economic trends, including international trade, exchange rates, and commodity prices.

Inflation vs. Deflation: Deflation is the opposite of inflation, where prices generally decrease over time. While deflation may sound positive, it can lead to economic stagnation and debt problems.

Long-Term Implications: Persistent high inflation can erode savings, reduce investment, and harm economic growth if not properly managed.

Inflation slows in Brazil due to the economic crisis and the truck drivers strike

Inflation fell from 4.83% to 3.84% in the accumulated of the last 12 months. However, this drop was mainly caused by the truck drivers' strike in 2018 and the economic slowdown that brought down consumption within the country.

Thus, inflation in Brazil, which had accelerated in the first four months of 2019, seems to be giving a truce in the last two months, according to data released by IBGE. After the scares of March and April, when the IPCA, official index of inflation, reached 0.75% and 0.57%, respectively, in May the rise slowed to 0.13%.

As a result, the National Monetary Council (CMN) decided to lower the inflation target by 3.5% to 2022. The target will have a tolerance interval of 1.5 percentage points, more or less, and the inflation target will be considered fulfilled if the index stays between 2% and 5%.

According to the G1 website, between 2005 and 2018, the inflation target in Brazil "was maintained at 4.5%. In the following years, it was reduced by 0.25 percentage points each year, from 4.25% in 2019 to 3.75% by 2021."

Now, the Brazilian Central Bank should seek even lower inflation. The mistake of the government here is to present absolutely no policy to combat the economic stagnation and the unemployment that reaches millions of people. As a result, this situation is likely to persist in the coming months.

An alternative to this would be to keep the inflation target at 4.25% and reduce interest rates to try to stimulate investment, but even now, this seems insufficient because of the government's delay in presenting any plan to change this scenario of economic stagnation.

The financial market in Brazil is negatively impacted by the political disagreements of the current government

The political swoops between President Jair Bolsonaro and his ministers with the National Congress are worrying Brazilian investors. The Social Security Reform has been going a long way because of the efforts of the mayor of the Chamber of Deputies, Rodrigo Maia. However, Maia and other deputies involved in the Reformation continue to have disagreements with the government of Jair Bolsonaro. Most of these disagreements arise because of the complete lack of political ability of the federal government.

According to the Folha de S.Paulo newspaper, this political disarticulation added to the "pressure of parties and the lobby of public servants impinges" the Pension Reform.

Cost of living in Brazil: inflation slows down in May 2019

According to IBGE, official inflation in Brazil slowed down to 0.13% in May 2019. It is the lowest result for May since 2006 (when the index was 0.10%) and the lowest monthly index of the year. In 12 months, accumulated Extended Consumer Price Index (IPCA) declined to 4.66% but remains above the center of the target set by the government for 2019, which is 4.25%. The exchange rate returned below R$ 4.00 and economic growth is still stagnant. This leads many analysts to bet on an interest rate cut by the Brazilian Central Bank.

The fall in the index was influenced by the deflation of 0.56% in the price of food and beverages. On the other hand, raised housing prices, which rose 0.98%. Health and personal care were also villains in the month, up 0.59%. Fuel expenses also weighed more on Brazilian families' pockets in May. Gasoline, for example, increased 2.60% in the period.

Brazil: inflation higher than expected by the government

Inflation in Brazil continues to rise, reaching 4.94% per year and getting distance from the center of the official target for 2019, which is 4.25%.

According to the IBGE, the Broad National Consumer Price Index (IPCA), considered the country's official inflation, stood at 0.57% in April 2019. This is the highest rate for a month in April since 2016 when the index was 0.61%.

When it reached 4.94%, the accumulated in 12 months exceeded the central inflation target of 4.25% set by the National Monetary Council (CMN).

The rise in the price of medicines was one of the main reasons for the growth of inflation in Brazil. The upward trend in inflation in Brazil is expected to continue higher due to the 3.43% increase in the price of the gas cylinder, authorized by Petrobras and in effect since 5 of May, and also by the increase in the price of energy consumption.

Cost of living increases for the poorest in São Paulo

O custo de vida em São Paulo, a maior cidade do Brasil, aumentou 5,10% para a população mais pobre no primeiro trimestre de 2019. For the richer classes, the increase in the cost of living in the same period was 3.67%.

The Cost of Living Index (ICV) in the city of São Paulo, which is calculated by the Department of Statistics and Socioeconomic Studies (Dieese), indicated an increase in the cost of living after analyzing the prices of 10 groups, including food, transport, recreation, personal expenses. Among them, food and transportation had the highest increases, with 1.36% and 1.26% respectively.

Meanwhile, preview inflation in Brazil accelerated to 0.72% in April, the highest for that month since 2015. The number surpassed expectations. For example, a Reuters survey with Brazilian economists estimated a 0.69% rise for the same period.

On the other hand, the Consumer Price Index (CPI) index of the Institute for Economic Research (FIPE) increased by 0.29% in April and accumulated inflation of 1.93% in the first four months.

Cost of living in Brazil: inflation accelerates

Brazil's Broad Consumer Price Index (IPCA) rose from 0.43% to 0.75% between February and March 2019, according to IBGE data. This is the 4th consecutive high of inflation and the highest index for March since 2015.

Therefore, the IPCA closed the month of March with a rise of 0.75%, which is above the top of the market estimates, which were between 0.50% and 0.70%.

As a result, the IPCA accumulated in 12 months jumps from 3.89% (well below the target of 4.25% to 4.58% (well above the target)

The item that had the highest growth was gasoline, which rose 2.99% and accounted for 0.12 percentage points of the inflation indicator.

Tomato and bean prices were the highest among food items. The tomato increased by 31.84% in the monthly comparison. Beans racked up 105 percent of the growth in its prices in the first quarter.

Cost of living in Brazil in 2019

Inflation has rebounded in Brazil. According to the Brazilian Institute of Geography and Statistics (IBGE), official inflation accelerated to 0.43% in February 2019.

High food prices and school fees were the main factors for the month's high. In 12 months, the accumulated IPCA (National Wide Consumer Price Index) rose to 3.89%. Despite this rise in prices, inflation is below the government's target for 2019: 4.25%.

According to Fábio Romão, an economist at LCA Consultores, fuel prices are expected to pull up in inflation now in March.

The constant crisis produced by the current government and the possible difficulty to approve a profound Pension Reform may make a more moderate inflation picture unlikely.