Brazil: Inflation threatens Lula`s Achievements

Inflation in 2008 estimated by the five institutions that most accurately project inflation rates will be 6.62%, which is above the maximum target limit (6.50%), according to the Central Bank’s Focus survey. For the first time, the number dropped, but only very slightly (0.01%). Up to the last survey (July 4), the market was betting on a 15thconsecutive weekly high.

To combat the return of inflation, the most serious problem faced by President Lula in his six years of government, the Central Bank increased the basic interest-rate (Selic) – which had been stationary at 11.25% for two years – by a percentage point in each one of the last two COPOM meetings (April and June). The trend is that this increase will continue over the next few months, until the economy shows signs of slowing down.

Within the government, the decision was reached to increase the primary surplus from 3.8% to 4.3%, as a way of removing cash from circulation and thus collaborate towards a drop in prices. The Minister of Finance is pressuring the Central Bank to also act towards reducing the rate of credit growth, which reached R$ 1.04 trillion in May, equivalent to 36.5% of GDP, the largest percentage since January 1995, when it reached 36.8%.

Statistics indicating the return of inflation had a strong impact on the government’s humor, especially because the last CNI/Ibope survey, carried out from June 20 to 23, has already revealed the damaging effects on President Lula’s prestige amongst voters.

Although approval of the government continues to enjoy an admirable percentage - 72% (with an insignificant drop of one percentage point), a policy to combat inflation occasioned a loss of 10 percentage points, going from 51% to 41%.  However, the worst news was the confirmation that of those earning up to one minimum wage (R$ 415,00), the president lost six percentage points in support: in March, 69% of those interviewed approved his administration, in June it was 63%. In the North and Midwest, the drop was even greater – 20 percentage points.

For an administration that sustains itself on Lula’s high popularity ratings – 58% which has maintained itself unchanged since March –, achieved due to good economic stability, and within three months will face an election, the level of stress has approached the most difficult period of the monthly pay-off crisis (first half of 2005).

According to the president’s cabinet chief, Gilberto Carvalho, in an interview to Vejamagazine, “inflation is currently the president’s greatest concern. On a scale from zero to 10, it scores a nine. Lula knows that his administration’s main merit is the economic improvement, food on the table.  This translates into a 90% of president’s popularity. Only the other 10% originates from his charisma”.

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