Jan 6, 2012

Brazil: Inflation in 2011

The inflation rate measured by the IPCA reached 6.5% in 2011, with a high compared to the previous year, when it reached 5.9%, as we can see in the chart below.

Several factors explain the rise in the index. Among them, we can mention the increase in international commodity prices and the pressure of the strong level of activity, especially in services prices.

We can divide the policy to combat inflation in two stages. In the first semester, the Central Bank raised interest rates and also took several macro-prudential measures aimed at restricting domestic demand through the credit crunch. These measures had no effect, and the inflation rate continued to rise, and peaked at 7.30% during the year.

In the second semester, the pressure of commodity prices had eased and there were signs that the level of activity was at a very low pace. In this scenario, the Central Bank initiated a fall in the Selic rate. However, this fall in the Selic rate was not enough for the resumption of economic activity, but the 12-month inflation eased somewhat, closing the year at 6.5%.

For the year 2012, inflation control is uncertain. Market forecasts show inflation around 5.5%, but the level of economic activity is very low and interest rates are still on the decline. The great challenge for policymakers is to reconcile the interest rates to economic growth without to fuel the inflation.

Source: IBGE


  1. You should take into account the time lag between monetary policy decisions and their effects. What happened with inflation in the second half of the year reflected to a large extent the monetary and prudential tightening in the beginning. In this sense, the loosening in the second half - the effects of which are still to be entirely felt - was only possible after it became clear that the domestic slowdown and the external environment were permissive of that.

  2. Thanks for the comment.

    I agree with your comments, maybe my text is not so clear. The macro-prudential measures and increased in interest in the 1st semester impacted economic growth in the 2nd semester. However, I believe it was not the intention of the government to reduce economic activity in the intensity at which it was reduced. One hypothesis is the non-expected effect of external enviroment on economic activity. However, I am not (still) convinced that the external crisis has had a significant impact. Commodity prices relevant to Brazil (iron ore and soybeans, for example) are still at high prices, despite a slight decrease, and also Central Bank data show that companies are able to roll your debts into USD without difficulty . Therefore, in my opinion, the measures were very strong and reduced economic activity more than desired.

    In 2012, economic activity should feel the effects of the Selic rate. However, my question is how the government will reconcile growing economic activity with inflation forecast above the target. This is the challenge for this year.