Monday, 5 May 2014

A Deeper Look at Brazil's Inflation Problem...

"Inflation surged again in Brazil during April, another worrying development for a central bank that’s seen as being keen to stay out of October’s presidential election" writes the WSJ today.

In the article, Roberto Padovani, an economist at Banco Votorantim, allegedly explains that “The problem with inflation in Brazil is deeper. Inflation in general in Brazil is too high because of the pressure on services costs due to higher salaries and low unemployment in recent years” and that “This kind of pressure is more difficult to combat.”

Well, the problem with inflation in Brazil is even deeper than what the WSJ reports. Something must surely drive those higher services costs and salaries and price inflation in general? The root causes of the "problem with inflation" can be found, as is usually the case, in aggressive money supply growth during an extended period.

Ending the "inflation problem" is relatively straight forward: end further increases in the money supply and communicate that this will be the policy.

Also see: What Do All Panic-Prone Emerging Markets Have In Common?