Understand

Lower cost of living allows Brazilians to plan their own consumption, in addition to ensuring maintenance of purchasing power

More than having a large table or a family budget without major tightening, the benefits of reduced inflation reflect significantly on the economic life of the Brazilian. The lower prices, without major oscillations, represent greater predictability for families, companies and even for the country's balance.

When one has high price constants, for example, the consumer avoids putting together money, and all his income is converted into goods. "Predictability is a fundamental thing for everyone," said Alexandre Cabral, a professor at the Finance Laboratory of the Fundação Instituto Administração. (FIA).

Until the mid-1990s, inflation was a more present word in Brazilian life, especially before the Real Plan. Only after the creation of the current Brazilian currency, the Country was able to live moments of more calm in prices.

Before the real, the life of the families had a strong unpredictability. It was not possible to make long-term plans because it was impossible to know how much a car, a sack of rice, or another commodity would cost the next day.

When a worker received the salary, he ran to the supermarket to do the shopping for the month. Money was constantly losing value and needed to be exchanged or invested in order not to be at a loss.

The companies avoided having cash on hand and were afraid to apply the funds. Every value that entered was converted into more inputs, trucks, and any other good. Without this ability to forecast prices in the future, the country could not build savings to finance infrastructure works or any other investment that could increase the productive capacity of the economy.

"The end of high inflation is the largest distribution of income that can exist. It does not mean that the person is going to be a millionaire, but the person starts to have a sense of prices," says Cabral. "End of inflation is indirect increase of salary, income is no longer eroded," he says.

What is IPCA

In practice, inflation is how much the price of a product varies over a given period. Assuming that a carrot cost R $ 2 in January 2010 and that in June had risen to R $ 2.10, carrot inflation would be 5% between January and June.

The Broad Consumer Price Index (IPCA) is Brazil's official inflation. This indicator, however, does not only measure carrot inflation, but that of all products that make up the Brazilian consumer basket.

In this account, everything is included: petrol, leisure, transportation, taxes, food, school, etc. To reach the final number, the Brazilian Institute of Geography and Statistics (IBGE) divides the products into groups, and each of them has a different weight, according to what the Brazilian consumes more.

Currently, inflation is at its lowest level in decades. In July, the IPCA varied by 0.24%. With this performance, the index accumulated in 12 months was 2.71% - the lowest level since February 1999.

With the fall in inflation, a way is opened for the fall in basic interest rates (Selic), which means cheaper credit for households and businesses. That is, the country has more conditions to increase the level of consumption, investments and generate employment.

"The recent trajectory of inflation has already opened the door for bolder declines in interest rates. This will be fundamental to the process of regeneration of consumption conditions in the second half of the year, "explains Fabio Bentes, economist at the National Confederation of Trade in Goods, Services and Tourism (CNC).

How to control inflation

In Brazil, for prices not to get out of control, a system of inflation target was created. It works like this: the National Monetary Council (CMN) defines an objective to be pursued by the Central Bank. In 2017, the goal is to leave the IPCA at 4.5%.

This goal, however, allows room for potential crises and price shocks. This means that, in exceptional situations, the IPCA may reach a maximum of 6% and at least 3%.

Source: Portal Brasil with information from  the Central Bank , I BGE ,  CNC  and Labfin / FIA