Inflation leaves Brazilians poorer for many years

Brazilians are coming out of the two-year pandemic period poorer, hit by the strongest inflation in two decades and the highest interest rates since 2017. The basic food basket today costs almost 50% more than in 2020. Durable consumer goods have risen so much that today the used car is worth more than when it was launched, zero km, two years ago.

Brazilians are poorer because family income is not keeping up with this high price. The minimum wage rose less than inflation. In addition, products are rising much faster than price indices. Even if the salary followed inflation, it would not be enough to restore purchasing power. To make matters worse, the average income of the population has dropped by 4.2% since March 2020. So, the trend is for everyone to get poorer for years. Only those who are promoted, change jobs, or win some prize or inheritance can get an adequate replacement.

The inflation that we have today impoverishes Brazilians, who have reduced purchasing power, because food, public tariffs, cooking gas, fuel, energy, everything has gone up far above inflation, and income has not been growing.
Antonio Corrêa de Lacerda, PUC-SP and president of the Federal Council of Economy

Income does not follow prices

Antonio Corrêa de Lacerda, coordinator of the graduate program in Political Economy at PUC-SP and president of the Federal Council of Economics, says that the loss of purchasing power of families will be permanent if workers’ income does not increase in real terms (above the inflation).

This means that simply replacing the IPCA (Broad Consumer Price Index), the government’s official inflation index, is not enough for a person to regain the power to buy goods that had their prices readjusted upwards in a certain period.

The basic food basket, for example, cost R$ 626.00 in São Paulo in March last year. In March 2022, it stood at R$761.19, an increase of 21.6%, according to Dieese (Inter-Union Department of Statistics and Socioeconomic Studies).

If a worker now received an 11.3% readjustment in April (official inflation in the period), he will have to buy less food. This loss of purchasing power is permanent, even with the readjustment. The person becomes poorer and cannot reach the level of consumption that he had before. And many workers do not even have the adjustment for inflation, which is even worse.

This mismatch continues because the basic food basket continues to rise in price every month, while the salary will only be readjusted – if it is – after 12 months, says economist Guilherme Moreira, coordinator of Fipe (Fundação Instituto de Pesquisas Econômicas, from the University of Sao Paulo)

High inflation always represents less purchasing power because people cannot make up for losses. The salary increase that comes up front does not restore purchasing power.
Guilherme Moreira, coordinator of Fipe

Rising prices; low income

Surveys from different sources show that prices are rising more than income. Many goods and services advance at a rate higher than the IPCA, which represents an average for the economy. See below for some price variations between March 2020, when the pandemic started, and last March.

  • IPCA: +18.2% (IBGE)
  • Minimum wage: +16%
  • Brazilian average income: -4.2% (IBGE)
  • Basic food basket in São Paulo: +46.8% (Dieese)
  • Basic food basket in Aracaju (SE): +34.5% (Dieese)

Poor suffer more

This inflation that is eroding the purchasing power of Brazilians mainly affects the poorest, economists say. This is because the items that are rising the most are precisely the essentials, such as food, cooking gas and energy, which weigh the most in the basket of lower-income families.

Inflation also affects upper-class families, but they somehow manage to adjust the budget, for example, by cutting expenses such as travel. In addition, those classes that have some type of financial investment are able to take advantage of the high interest rates to improve the yield on investments. The lower income classes do not have these tools to face these price increases.
Guilherme Moreira, coordinator of Fipe

Less power to invest too

But even those who have the privilege of saving part of their budget to invest and plan for the future are getting poorer, says the chief economist at Ativa Investimentos, Étore Sanchez.

Investing is also a type of consumption, so inflation reduces the family’s ability to seek protection from capital and wealth. This inflationary impact is irreversible even if there is a recomposition through wages.
Étore Sanchez, chief economist at Ativa Investimentos

Stagnant income increase

To contain the impoverishment caused by inflation, the way forward would be to increase the population’s income. But high unemployment and low economic growth hamper the ability of families to regain purchasing power or at least keep up with inflation, economists say.

We show in this report that the number of categories of workers who get readjustments at least equal to the variation of inflation is increasingly smaller.

Formal workers are struggling to make up for lost wages, with the economic crisis and the toughening of negotiations since the 2017 labor reform, which devalued collective bargaining and weakened the union movement.
Fausto Augusto Júnior, technical director of Dieese.

According to the Dieese economist, the deregulation of the labor market by the labor reform, the end of regulating food stocks and the discontinuity of policies to strengthen family farming put the Brazilian economy in a vicious circle, difficult to reverse in the short term.

For Corrêa de Lacerda, from PUC-SP, the recovery of Brazilian purchasing power depends on economic growth. And for that, the government needs to adopt competitiveness policies to generate more jobs in higher added value sectors, such as industry, which pay higher wages.

When contacted, the Economy Ministry said it would not comment on the matter.