Brazil prices and inflation studied.

Brazil has had a difficult time managing inflation. The annual increase in the rate of inflation fell below four digits only in 1995. Low double digits were achieved in 1996. As recently as 2003, the annual inflation increase again spiked to double digits at 14.8 percent. The average annual increase in the rate of inflation from 1996 through estimates for 2008 is 6.5 percent. The source of these statistics is the International Monetary Fund (IMF) with some simple calculations from Market: Latin America Statistical Analysis, both from 2007.

To develop a deeper understanding of price mechanisms in Brazil, and the persistence of inflation, the Central Bank of Brazil (BCB) studied prices from 1996 through 2006. The results of the study were released in August 2007.

The BCB found, first, that prices in Brazil "remained fixed" for, on average, 2.7 to 3.8 months depending on how the average was calculated. More revealing was an analysis of how many price series changed over what period of time. Of the huge number of prices studied, 41.75 percent changed within two months. Another 15.05 percent changed within one month.

The BCB also found that 37 percent of prices in Brazil changed monthly. The study compared prices changes in Brazil with price changes in the European Union (EU) and in the United States (US). In the US, 26.1 percent of prices change monthly. In the EU only 15.3 percent of prices change monthly. "Results suggest prices are more flexible in Brazil," says the BCB.

An obvious conclusion is, "Substantial increase in (actual and expected) average inflation imposes a high enough cost of not [emphasis ours] changing prices and speeds up price reviews."

Outside influences (shocks) influence price setting, says the BCB, with services more involved than other economic sectors. Whatever impact there might be from Brazil's history of inflation battles is not clear from the study.

One possible conclusion from this wide ranging, interesting study is that there are mechanisms behind inflation that are yet to be controlled or even studied.

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