All Knowledge about effects of Inflation-in-Brazil

All Knowledge about effects of Inflation-in-Brazil

1. Introduction to Inflation in Brazil Inflation has been a persistent challenge for Brazil's economy. This presentation will explore the historical trends, causes, the impact of inflation on the Brazilian economy and the measures taken by the government to control inflation.

2. Historical Trends of Inflation in Brazil 1 1980s Brazil experienced hyperinflation during this decade, with annual rates reaching over 1,000%. 2 1990s Inflation was brought under control through the implementation of the Real Plan, but still remained high. 3 2000s-2010s Inflation rates fluctuated, with the Central Bank using monetary policy tools to try to maintain stability. This Photo by Unknown Author is licensed under CC BY

3. Monthly Inflation Rate of Brazil

4. Factors Contributing to Inflation in Brazil 1. Endogenous economy and Lack of Foreign Trade : Brazil's lack of foreign trade and strong reliance on domestic supply made the economy vulnerable to internal price shocks, leading to price volatility and inflation. A strong reliance on domestic supply meant that prices were more volatile and likely to be inflated, such as increased food prices caused by weather-related shocks. 2. Inertial Inflation : According to economists, one of the causes of inflation in Brazil was the ​Inertial Inflation​phenomenon. Prices were adjusted on a daily basis according to changes in price indexes and to the exchange rate of the local currency to the U.S. dollar.

5. 3. High external public debt : The asymmetrical balance sheet of the public sector may have been a causal factor for Brazil’s hyperinflation as high external public debt can be indirectly linked to inflationary pressures.The government imposed higher taxation to service this large external debt (principal and interest) which was then offset by higher prices set by producers which facilitated inflation. The large fiscal burden to service foreign debt could not be covered by tax receipts

6. Impact on the Brazilian Economy 1 Currency Depreciation Hyperinflation and economic instability led to significant depreciation of the Brazilian Real against major foreign currencies which made imports more expensive. 2 Diminished Investment High inflation creates uncertainty, discouraging businesses from investing in long-term projects and expansion. 3 Widening Income Inequality Inflation affects low-income individuals and families, as their purchasing power diminishes rapidly and they struggle to afford basic necessities when prices soar, exacerbating income inequality within society. 4 Undermining Economic Stability To combat inflation, the Brazilian government implemented tight monetary policies, including high interest rate but it had adverse effects on borrowing costs, hindering investment and economic growth.

7. Failed Preventive Measures Taken by the Brazilian Government to Control Inflation Cruzado Plan (1986) Bresser Plan (1987) Summer Plan (1989) Collor Plan (1990)

8. PLANO REAL (1994) According to economists, one of the causes of inflation in Brazil was the inertial inflation phenomenon. Prices were adjusted on a daily basis according to changes in price indexes and to the exchange rate of the local currency to the U.S. dollar. Plano Real then created a non-monetary currency, the Unidade Real de Valor ("URV"), whose value was set to approximately 1 US dollar. All prices were quoted in these two currencies, cruzeiro real and URV, but payments had to be made exclusively in cruzeiros real. Prices quoted in URV did not change over time, while their equivalent in cruzeiros reals increased nominally every day. A new currency called the real was introduced on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, replacing the short-lived cruzeiro real in the process.

9. Follow-Up Actions taken by the Government to make "PLANO REAL" a success ​​For restricting the government expenses and raising interest rates, a series of contracting ​fiscal ​and monetary policies ​were enacted . By doing so, the country was able to keep inflation under control for several years. In addition, high interest rates attracted enough foreign capital to finance the current account deficit and increased the country's international reserves. The government put a strong focus on the management of the balance of payments , at first by setting the real at a very high exchange rate relative to the U.S. dollar , and later (in late 1998) by a sharp increase on domestic interest rates to maintain a positive influx of foreign capitals to local currency bond markets , financing Brazilian expenditures. The Plano Real and subsequent fiscal reforms of the late 1990s managed to bring inflation under control and restore macroeconomic balance.

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