Picture above look delicious? I guess it sometimes pays to be an American traveling internationally with a good exchange rate. That doesn’t mean things aren’t hard for those living in Brazil. Food inflation remains a large problem throughout Latin America. Just take an example of a menu for a widly popular trendy hamburger joint we encountered in Rio de Janeiro.
You would think you were dining in Midtown Manahttan, not in a developing country. To put 25 Reais in perspective, 10% of Brazil’s population still lives on 4 Reais…a day!
Why is this happening? It is simple, Brazil has long tried to juggle pro-growth economic policies, with inflation reducing measures. Brazil’s monetary authority has moved its basic borrowing rate gradually to 11% from 7.25% over the last year in an attempt to tame inflation, which is officially reported at 6.4%. The central bank’s official target for CPI is 4.5%, with a range of tolerance of +/- 2%. That means Brazil is hovering right near it’s inflation upper limit.
While U.S. stocks continue to hit all-time highs post financial crisis, the same is not the case for many world economies, including Brazil. So why hasn’t Brazil enjoyed the benefits of a worldwide “recovery?”
Brazil has dropped borrowing costs from 20% to 9% over the last 10 years, making it easier to get credit, start businesses, and buy homes. Typically interest rates fall as inflation falls, but that is not the case in Brazil. The CPI inflation rate was 3.14% in 2006, but now stands at 6.4%. That ranks 180th in the world. To encourage growth, interest rates are historically low, yet inflation creeps up every year. This is the conundrum of central bankers in emerging economies. GDP growth in Brazil has slowed dramatically, to 2.3% in 2013, from 7.5% in 2011. With Brazil, the recipe for a flat stock market is pretty simple. High inflation and low growth. The dreaded “s” word—-
STAGLFLATION
Barclay’s Chief Brazilian Economist Marcelo Salomon recently told the WSJ he fears the central bank’s latest economic assessment is too optimistic. He said he doesn’t see confidence recovering from a recent slump, even with hundreds of thousands of tourists flocking to Brazil for The World Cup. Mr. Salomon has forecasted a World Cup hangover for the economy, telling the WSJ, “producers will find themselves with high levels of inventory and will have to make layoffs…All our indicators point to a weak investment environment.” He contends the central bank shouldn’t have stopped raising interest rates, and the economy will soon pay a price.
Interest rates, inflation rates, and GDP growth, things every central banker must juggle when making monetary policy, and in Brazil the right formula has not been discovered.
In our next post, we take you deep into the heart of two of Rios favelas!
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