Brazil CPI, Essay Example

An online article on Bloomberg reports that Brazil has increased its key rate for the first time since April this year. This is quite an unexpected move as 1 of the 54 economists surveyed by Bloomberg predicted so. The country’s central bank’s President Alexandre Tombini hopes this move will help control inflation in 2015 and 2016. Brazil’s re-elected President Dilma Rousseff has mentioned controlling inflation as one of her major priorities in her second term. President Rousseff is concerned inflation may threaten the country’s gains towards low unemployment levels as well as wage gains. Even though the central bank’s inflation target is 4.5 percent with a variation of 2 percentage points in either direction, the current annual inflation rate is 6.62 percent which is above the bank’s comfort level. The high inflation rate has not only eroded consumer confidence but has also negatively affected investment spending as well as economic growth(Lima and Malinowski).

CPI measures the proportional change in prices of selected goods and services which account for bulk of the spending for an average consumer. It is not difficult to see the rationale behind Brazilian central bank’s decision to increase key rate. When key rate is lower, it becomes cheaper for consumers to borrow and as a result, more money starts chasing a particular amount of goods and services, increasing the prospect of inflation in the process. This, in turn, increases the cost of living. Not surprisingly, the customer confidence has eroded and investment spending has also declined because they have become more expensive for companies. The reduction in consumer spending as well as business investments as a result of inflationexplains why inflation has negatively affected economic growth. Now the central bank hopes that higher key rate will reduce the supply of money and help control inflation in the country.

This article also hints at GDP growth of Brazil that it has been hurt by high inflation. It makes sense because when prices are high, the demand for goods and services fall. As a result, producers of goods and services respond by cutting their production activities as well as investment plans. The central bank probably kept key rate low in order to spur demand for goods and services so that GDP rate is high and the country can successfully recover from the financial crisis of 2007. But it may be that the key rate has been kept low for too long that it contributed towards high inflation rate.

It is possible that the country has not fully recovered from the recent financial crisis which may be why all except one economists didn’t expect the key rate to change. But it is always a difficult task to strike a balance between promoting growth and keeping inflation in check.

The response of Brazilian central bank is not surprising because news about American economy also often talk about the danger of keeping interest rates low for so long that high inflation becomes a major problem. So far the high inflation possibility seems low which may be why Fed is still maintaining the fed funds rate at low level. But once the inflation rate starts increasing, the U.S. Fed may follow the same path as Brazilian central bank, i.e. increase fed funds rate in order to contain inflation.

Work Cited

Lima, Mario Sergio and Matthew Malinowski. Brazil Unexpectedly Lifts Rate on Rousseff Vow to Tame CPI. 29 October 2014. 29 October 2014 <http://www.bloomberg.com/news/2014-10-29/brazil-unexpectedly-lifts-rate-on-vow-to-tame-cpi-correct-.html>.