No Monetary Chaos Grips Brazil--Yet : Economy: The reality so far is not as disastrous as feared. Indexing of prices, wages to inflation eases the impact.

RIO DE JANEIRO —  A few months ago, hyper-inflation was the feared black beast of Brazil’s worst economic nightmare. The word evoked visions of unmanageable monetary chaos, with wheelbarrows full of nearly worthless currency and business transactions reduced to primitive barter.

Now, as the cost of living rises by more than 70% a month, the reality is daunting indeed--but so far not as disastrous as feared.

“People seem to believe that in hyper-inflation there is chaos. That’s not true,” said Gustavo Franco, an economist at Rio’s Catholic University.

Economists have long theorized that true hyper-inflation sets in at about 50% a month. But with Brazil’s system of indexing wages, prices, rents and other values to keep up with inflation, “nothing happens at 50% that wasn’t happening at 30% or 20%,” Franco said in an interview. “It’s the same process, just quicker.”

Often, prices are increased to keep up with expected future inflation, thereby adding fuel to the flames. Because the process is so fast and disorderly, relationships between prices for different goods and services become severely distorted.

For example, Brazilian newspapers noted recently that a small bottle of a popular sunscreen had come to cost as much as a day’s stay at a two-star hotel.

Prices for a product also vary widely from store to store, sometimes by as much as 100%.

“Housewives spend more and more time going to different shops researching prices, and it pays,” Franco said.

Although wages are adjusted every month, many workers receive special raises once a year to make up for lost buying power. Because the special raises come at different times for different job categories, relative salaries are often out of line.

Salomao Quadros da Silva, an economist at the Fundacao Getulio Vargas, a research institute, said his own monthly salary was the equivalent of $1,300 last May after an annual readjustment. Despite monthly indexing since then, he said, it is down to about $850.

He calculated that because of the lag between the time the official monthly inflation index was calculated and the time monthly raises were given, salaries lost about 10% of their purchasing power in February alone to the month’s record 73% inflation. To partly compensate for the lag, many companies have begun paying employees two and three times a month instead of at the end of the month.

Economists agree that the root cause of hyper-inflation in Brazil and neighboring Argentina is that the governments spend much more than their revenues. To finance their deficits, they borrow heavily through treasury bonds and other financial instruments that offer inflationary interest rates to attract funds. Businesses set their profit goals to match the interest rates, often raising prices above cost-of-living indexes.

Brazil’s president-elect, Fernando Collor de Mello, has promised strong measures to break the hyper-inflationary cycle immediately after he takes office Thursday. Many economists predict that the cost of subduing the inflationary beast will include a short recession.