Inflation: what it is and how it impacts your pocket 724w18

You must have heard or read phrases like “inflation is increasing” or “inflation is at X%” — this is not a strange concept to Brazilians — but you know what its causes and impacts on your pocket are ? 3s5568

In this guide, we will explain exactly what is inflation and why this term is so present in our lives, in addition to how it works, how it can be measured and compared with other countries and what are the consequences of a high inflation rate for citizens.

What is inflation? sw1k

Let's start from the beginning: inflation is the word used to represent the general increase in prices of goods and services in a country without an appreciation of the national currency. That is, when there is an increase in the cost of living and a reduction in the purchasing power of a population.

how much you could buy with 5 reais when you were a kid? And how much do these 5 reais buy now? Well, that's inflation. And it's not even necessary to look too deeply into the past: what did you spend at the supermarket, or how much did you pay for rent, school or college, gym, among other products and services on the market, a year ago, do you buy the same things today?

It’s worth noting that a rise in prices doesn’t necessarily mean a bad thing, especially when it’s spaced out over the years and comes with wage hikes, just as a fall doesn’t always mean a bad thing — merchants earning less than they invested in the stock. daily can generate a snowball in the medium term.

The big problem is when there is a rise (or fall) faster than it can be absorbed, leading the nation to an economic crisis.

Causes of inflation 6z184k

There are several causes for an increase in inflation, grouped into four broad categories:

• Increase in demand;
• Increase in production costs;
• Increase in currency issuance;
• Inflationary inertia.

However, it is unlikely that the cause of inflation will be just one, since usually one problem is related (or ends up generating) others.

Increased demand 2xa5a

A law of supply and demand it is one of the most basic of capitalism: when supply is greater than demand, prices fall; when demand is greater than supply, prices rise.

When this relationship is in balance, all is well. However, when a population starts to have more income (or the currency appreciates) quickly — and, consequently, the demand (or demand) suddenly increases — the supply usually cannot keep up with the demand, which ends up raising prices and inflation.

A good way to exemplify this mismatch is the current job market. There is a high demand for technology professionals worldwide, including in Brazil, but there are not so many professionals available to meet this demand. Thus, the salaries of these professionals end up rising internationally.

Likewise, if there is a drought in a period that is usually rainy and harms the expected harvest, the prices of these products will increase, because the demand will remain the same, but there will be less availability.

Increase in production costs 73j2m

A similar scenario, and often connected to that of inflation due to increased demand, is the increase in production costs, as it also impacts the previously mentioned supply and demand relationship.

When there is a sudden increase in the cost of producing certain products or goods (such as wage or tax increases, or shortages, or supply of raw materials, for example), companies tend to this cost on to the consumer. This causes them to sell for higher prices, thus increasing inflation.

Some examples are the increase in the price of electricity (consequently, every industry that uses electricity in its production will pay more, which means an eventual -through of costs to possible intermediaries and, mainly, to the final consumer), or fuel ( since the logistics of transporting products and people depends a lot on highways).

In any of these cases, if the producer eventually decides to manufacture fewer products due to the increase in the cost of raw materials or any other reason, there will be less availability in the market, becoming insufficient to supply the demand. This is how the increase in production costs can be related to the increase in demand — and raise the country's inflation rates.

Increase in currency issuance 181654

In some cases, the government can impact the increase (as well as decrease) of inflation. When spending happens to be greater than collections, it is sometimes necessary to issue more paper money (print more money) to settle the s.

However, when this happens, there is a greater amount of money circulating in the country, but it has no ballast, that is, it is not associated with an increase in real wealth generation.

Thus, the situation can quickly become complicated, since there is more money circulating, not associated with the country's wealth, but without an increase in the supply of products and services, generating an increase in prices.

You can already understand how these categories are interconnected, right?

Inflationary inertia 393m1a

Last on our list, the inflationary inertia is the process in which past inflation is reflected in current prices of goods and services. This usually happens due to indexation, a mechanism that automatically readjusts prices, salaries, assistance benefits, as well as certain goods and services specified in the contract (such as rents) or istered (electricity, for example).

In this case, the objective is to restore the population's income, eroded precisely by inflation. However, this type of indexation can generate a of this same inflation, becoming a snowball.

So how is inflation calculated? 3y3rg

As there are several factors that can generate high inflation in a country, it is necessary to evaluate a series of indices to track its variation.

One of the main gauges is the HI (Broad Consumer Price Index), which tracks the price variation of a specific set of products and services consumed by families earning between 1 and 40 times the minimum wage. The “broad” in the name is related to its objective of covering 90% of the Brazilian urban population. In addition, it is calculated monthly by the IBGE (Brazilian Institute of Geography and Statistics).

Another index used to measure inflation is the INPC (National Consumer Price Index), which measures the fluctuation in the prices of goods and services for families with an income of up to five times the minimum wage. Because of this, this meter serves as a thermometer for readjustments made to the minimum wage.

O PGI (General Price Index), measured by the Getúlio Vargas Foundation (FGV), is also used, this time with a very specific purpose and focused on wholesale and retail: recording the rise in prices throughout the production process (from the raw material used to the final version of the good or service offered to the consumer).

The rate Selic (Special System for Settlement and Custody), in turn, is related to interest rates in the Brazilian economy. According to the Central Bank (Bacen), it is the adjusted average rate of daily financing calculated in the system for federal securities. This means that the Selic percentage indicates how much the government pays in interest to people who buy public debt securities from the National Treasury.

A Selic it can be used by the government to control inflation, stimulating or discouraging consumption based on the cost of credit. Thus, if the Selic is lowered, the basic interest rate, as well as investments in savings, fixed income and government bonds, start to yield less, while loans become cheaper in general.

This is a tactic used by the government to stimulate consumption and production, as the population is discouraged from saving and credit becomes more accessible. However, considering the long term, this could generate new inflation, increasing demand.

In addition to these, there are several other gauges to assess inflation indices, such as the PGI-10 (General Price Index - 10), IGP-M (General Price Index - Market), IPA (Wholesale Price Index), and the IPC-Fipe (Consumer Price Index).

consequences of inflation 4m6v2r

The main consequence of inflation, as you may have already noticed, is the fall in the purchasing power of an entire population over time, due to the increase in the price of products and services and the devaluation of the currency.

Prolonged and out of control, inflation can discourage sectors of the economy, and even foreign companies, from investing in the country, thus aggravating the crisis and generating more uncertainties about the course of the nation.

In addition, inflation has a direct impact on investments. In order to know how much an application actually yielded, it is necessary to deduct inflation from the accumulated total. So, if an investment returned 13% and inflation over that period was 5%, the real return is 7%. However, if inflation was greater than 13%, the person actually lost money. This can happen with applications linked to the Selic, if the rate is below inflation.

What is inflation in Brazil today? 6y691g

As we commented, inflation changes according to the economy (and measures adopted) in each place. Thus, there are countries that live with a relatively low rate and others that are used to living with higher rates.

An example of this is the Eurozone (European countries that have adopted the use of the same currency). In July this year, inflation in the region stood at 8,9% (in January, the rate was 5,6%), while in July 2012, the rate was 2,4%. These are countries used to living with lower rates, so the figure of 8,9% in July can be considered high for the region.

In Brazil, in turn, we have a classic history of inflation, with an unbridled increase between the 1980s and 1990s, reaching 2.400%. In July 2012, the rate was 5,84% (3,44% above the Euro Zone), while in July this year it was around 7,1% (below the Euro Zone).

For 2023, the estimate is that inflation will reach 5,36%, while for 2024 and 2025, the projections are 3,3% and 3%, respectively.

Brazilian history b5x3o

Inflation has been one of the main problems of the Brazilian economy for some time now. During the 1940s, the first half of which saw World War II, prices rose by 215,6% between 1940 and 1949 (an average of 12,2% per year).

It is worth mentioning, however, that despite the high inflation throughout that decade, it can be divided into two stages: the first, until 1944, with high and increasing rates, and the second, from 1945, with moderate rates ( the government froze the prices of foreign currencies to avoid greater internal impacts)

In the following decade, however, inflation reached 460% (with annual rates oscillating between 12% and 40%), ending the year 1959 with a rate of 40%. With a big difference between the rates at the beginning and end of the decade, many expected that the 1960s would bring a new lease of life, but that was not what happened.

In the early 1960s, prices rose very fast, pushing inflation from 30% in 1960 to over 90% in 1964. It was at this time that new stabilization policies, based on price controls, balancing government finances and wage reductions emerged, promoting a persistent decline in inflation in the following years, ending 1969 at around 19%.

This coincides with the phase that became known as the “Brazilian miracle”, starting in 1968 and lasting until 1973. At that time, the military dictatorship took advantage of high oil prices to exploit its advantages, aiming to accelerate Brazilian industrialization and economic growth. . (https://fiberclean.com)

However, in the external scenario, the situation changed after 1973, when the First Oil Shock took place. Producing countries stopped selling oil to Israel's allies, quadrupling the price of a barrel in a year. The United States, in turn, raised interest rates on the international market and reduced remittances to developing countries as a way to withstand the increase in oil.

Thus, Brazil stopped receiving loans and started paying exorbitant interest. As a result, there was a wage squeeze, currency devaluation and a reduction in the purchasing power of the population. Thus, the country ended the decade with an inflation of 80%.

Brazil entered the 1980s with a great deal of experience in dealing with long periods of economic instability, but this was of no use in dealing with high inflation. Even with measures such as exchange rate fixing, monetary correction and a reduction in interest rates, inflation continued to grow, reaching a level of 100% in 1981 and 1982 and 200% in 1983-85. The devaluation of the currency in this period reached such a point that, eventually, the products in the supermarkets (or other stores) were readjusted more than once a day.

Despite some attempts at stabilization between 1986-89, with the Plano Cruzado being launched in 1986 and the Plano Verão in 1989, including the introduction and creation of a new currency, the Cruzado Novo, the decade ended with a rate of 1.999% ( only in December this year, monthly inflation was 50%. Thus, it is not surprising that this period became known as “the lost decade”.

Hyperinflation in Brazil 4b2i5j

The 1980s brought a 4-digit inflationary range that extended into the 1990s. The first three months of 1990 were characterized by a period of hyperinflation (when the average price level of goods and services increases by more than 50% per month) – the monthly rates in January, February and March were 71,9%, 71,7% and 81,3%, respectively.

During the beginning of the decade, the government of Fernando Collor initiated several neoliberal and free-market reforms with the objective of containing hyperinflation and remedying the technological backwardness in the country, including the Collor I and II plans.

Thus, Plano Collor I was launched on March 16, 1990, the day after his inauguration as president, and among the main measures were:

• confiscation of savings in s with more than 50 thousand cruzeiros (the amount would be returned after 18 months, with interest correction of 6% per year – as this never happened, people had to go to court to get their money back);
• creation of a new currency, Cruzeiro, and the IOF (Tax on Financial Operations);
• privatization of state-owned companies and commercial opening

Despite having reduced inflation in the short term (the monthly rate was from 82,4% in March to 7,6% in May), the Collor I Plan was a failure because, in addition to not being able to contain inflation, this economic package was extremely unpopular.

Thus, in January 1991 the Collor II Plan was launched, with measures similar to the first. Again, there was only a good result in the short term – at the end of the year, inflation reached around 472%, there was an increase in unemployment, a drop in GDP (Gross Domestic Product) and the impeachment request of Collor, who resigned in 1992. .

Between 1993 and 1994, a new currency, the Cruzeiro Real, was launched. At the end of 1993, inflation reached its highest peak, reaching 2.400%.

After almost a century of failed economic plans, the government of Itamar Franco launched the Plano Real in early 1994, divided into three stages: stabilization of public s, launch of the Real Unit of Value (URV), and the launch of the Real.

URV was created to assist in the transition process from Cruzeiro Real to Real. The government established, daily, the value of the virtual currency (in Cruzeiro Real), so that inflation continued to rise in Cruzeiro Real, but not in URV. In addition, the value of the URV was the closing price of the dollar on the previous day, which dollarized the Brazilian economy.

On the transition day (July 1, 1994), one URV was equivalent to 2.750,00 Cruzeiros Reais. Afterwards, the URV was converted to Real on a one-to-one basis, with the real being worth 2.750 cruzeiros. Inflation in July 1994 was 46,6%, and the first rate recorded under the Real was 6,08%, a record low in many years.

Since then, Brazilian inflation rates have remained at levels that are bearable for development (despite some crises that have raised inflation for a certain moment) and the cost of living for a considerable part of society.

How to protect yourself from inflation 5d222g

Despite having an impact on society in general, it is possible to adopt measures to protect at least part of your money against inflation. For this, you can invest a portion of your savings in assets with a yield linked to inflation itself.

One option is the IPCA+ Treasury, a security that pays a fixed rate of interest added to the variation measured by the HI. In addition, there are debentures, corporate debt securities, which may have a yield linked to the IPCA, as well as CBDs (Bank Deposit Certificates) and the LCIs (Mortgage Letters of Credit) and LCAs (Agribusiness Letters of Credit).

Other options are investment funds (or inflation funds), linked to price indices, real estate funds (which may have contracts linked to inflation), and variable income investments, such as investments in companies that have services or products adjusted with inflation. .

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Sources: Central Bank of Brazil, Serasa