THE ECONOMY
INFLATION
Before the Real Plan
The cumulative inflation in the four years preceding the Real Plan was approximately 3,500,000%, as measured by the IPC-FIPE consumer price index calculated by the FIPE economic research institute (Fundação Instituto de Pesquisa Econômica).
In the 12-month period prior to implementation of the Real Plan, the annual inflation recorded by FIPE reached 5,200%.
Under the Real Plan
In the 12-month period ending in May 1999, there was a deflation of 0.24%, which means a decrease in average prices.
According to estimates made by private consulting firms and by the financial markets, inflation is expected to reach about 7% in 1999, reflecting the steep rise in prices that took place in the first quarter due to the shift in exchange policies and, above all, of the unusually large currency devaluation that occurred in January and February of 1999.
During the past five years there has been a steady decrease in inflation rates, with a brief interruption in the first quarter of 1999, which was caused by the shift in exchange policies. The move to a free exchange rate system led to a realignment of relative prices. Nevertheless, this did not cause a continuous and overall increase in prices.
This outcome was made possible only due to the monetary policy adopted and the effects of the liberalization of the economy, which created a new standard of competitiveness in the domestic market. This change, aside from having generated an improvement in the quality and variety of the products and services available to the consumers, practically eliminated the automatic passing on of cost pressure into prices.
In July 1994, when the minimum wage was R$ 65,00, the cost of the basic market basket was R$ 102,00. Yet in May 1999 the amount of the minimum wage was R$ 136,00, greater than the R$ 124,20 cost for the basic market basket.
The graph demonstrates that the amount of the minimum wage began to be greater than the cost of the basic market basket in May 1996. Since the beginning of the Real Plan, the minimum wage has increased approximately 110%, while the basic market basket has scarcely reached 14%.