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Three Years of the Real Plan
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Three Years of the Real Plan
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I - Currency Stabilization
The continued fall in inflation since the beginning of the Real Plan represents the greatest accomplishment of the Brazilian people in recent years. In the first half of 1994, consumer prices increased, on average, by more than 40% per month. In June 1995, the first anniversary of the Real Plan, accumulated inflation for the 12 months was 30%; by the Plan's second anniversary (June 1996), this annual percentage had been reduced to 15%. Now, after three years, Brazilians live with an annual inflation rate of about 8%.
Monthly inflation fell from 40% to 0.55%.
It is well known that stability has benefited the entire country. Low inflation means that salaries maintain their purchasing power. This was not the case prior to the Real Plan. Even though salaries were readjusted each month, the velocity of price increases was always greater than that of the readjustments, thereby eating away the purchasing power of salaries. Low inflation brought a generalized change of attitude: indexation, which had been a perverse mechanism that automatically extended past inflation, is slowly disappearing from the population's daily lives. Those who had been least able to protect themselves against inflation (namely, those without bank accounts or means to invest in the financial market) are those who have benefited most from the end of indexation.
The lowest income segments of the population, therefore -- without any doubt -- enjoyed the most significant gains from the currency stabilization produced by the Real Plan. The change in the cost of the basket of basic food items in the last three years demonstrates this fact. On July 1, 1994, it costed R$106.95; on June 11, 1997, it costed R$112.03. This change represents an increase of less than 5% in 36 months. To illustrate, at the beginning of the Real Plan, more than 1.6 minimum salaries were needed to purchase a basket of basic food items; today, one minimum salary purchases a basket of basic food items and a little more.
Important changes have occurred in the structure of relative prices over the last three years. From the very beginning, with the opening of the economy, the prices of imported products were stable because of foreign competition. But the story was different in the service sector. Without the stabilizing effect of international prices, service prices increased initially in response to increased demand spurred by the currency stabilization. This was the case with rents, school tuitions and medical fees. With the passage of time, prices of these services also adjusted and their fluctuations are converging toward the average rate of other prices. This is the good news. With all prices converging toward a lower rate of increase, not only food and clothing become part of the new world of stabilization, but also major items like school tuitions and rents cease to be the villains they were at the beginning of the Real Plan and become affordable to the consumer.
