Brazil's Economy
Living with Indexed Inflation
How Brazil lived with very high inflation by indexing wages, prices and contracts to inflation, why indexation made inflation self-perpetuating, and how the URV bridged to the Real.
Brazil had very high inflation for decades, with hyperinflation in the late 1980s and early 1990s.
Indexation
To cope, Brazil indexed almost everything to inflation:
- Wages adjusted automatically.
- Rents and contracts linked to price indices.
- Bank accounts paid inflation-linked returns.
Why indexation helps
People and businesses were protected from losing value.
Why it hurts
- Past inflation fed automatically into future prices, creating inertial inflation.
- Breaking the cycle was very hard.
Failed plans
Several plans (Cruzado 1986, Collor 1990) froze prices or seized savings but failed.
The URV trick
In 1994, economists created the URV (Real Value Unit), a virtual unit of account. Prices and wages were set in URVs, which tracked the dollar. When everyone used URVs, the new real currency replaced them, breaking inertial inflation.
Economists behind it
Economists Pérsio Arida and André Lara Resende proposed ideas that shaped the plan under finance minister Fernando Henrique Cardoso.
In 1993, supermarket workers changed price labels daily. Shoppers rushed to spend wages before prices rose further.
It protects people but makes inflation self-perpetuating.
- Brazil indexed wages, rents and contracts to inflation.
- Indexation created inertial inflation.
- Several stabilisation plans failed.
- The URV in 1994 bridged to the real and broke inertia.
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