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

Brazil: Imports of Consumer Goods Rose Sharply in the Last Decade

Over the last 10 years, the Brazilian domestic demand has been stimulated by measures such as increase in real wages, government programs of income distribution, credit expansion and mainly, the appreciation of exchange rate. The unemployment rate is very low, which has pushed wages, which are also at record levels.

See also:

Credit Operations

Industrial Production

However, the expansion of supply has not kept pace with demand. Industrial production shows stability, and what we see is that this excess demand has been matched mainly by increasing of imports. In the chart below, the left axis shows the volume of imports of consumer goods. As we can see, the volume of imports of consumer goods reached USD 40 billion in 2011, and shows an average annual growth of 17%. On the right axis, we see the share of imports of consumer goods in relation to total imports, and this value was 11% at the beginning of the last decade and is now close to 18%.

See also:
Wages
Unemployment

This data raises the following question: is this framework sustainable? In fact, increased imports have been financed by high international prices of major commodities exported by the country. While commodity prices to remain high, they will continue to finance consumption in Brazil.

See also:
Commodity Prices
Balance of Trade

Source: MDIC

Brazil: Exchange Rate 2011

In 2011, the dollar appreciated 12.6% against the Brazilian Real. As we can see from the chart below, this movement had two distinct periods. In the first eight months of the year, the dollar was in the process of fall in relation to the BRL, and reached its lowest point in July, with cumulative drop of 8% in the year. However, a number of factors contributed to change the course of the exchange rate. Among these measures is the introduction of taxes on foreign exchange derivatives market, which affected the taking of short positions in exchange rate. Also, the crisis unfolded in Europe and the consequent movement of risk aversion led to the outflow of the resources. In September, the dollar reached its peak, up 14%.

Source: Central Bank of Brazil