Brazil Freezes Pay, Prices to Cool Inflation : Economy: The cost of living soared 20% in January alone. It is the latest setback in the new president’s economic reform effort.

RIO DE JANEIRO —  Dismayed by inflation of 20% in January, the Brazilian government Thursday decreed an immediate freeze in prices and salaries.

Economy Minister Zelia Cardoso de Melo also announced the elimination of official treasury indexes used to readjust interest rates and other payments. Economists say the indexing system helped perpetuate inflation.

To prevent confusion at banks, today was declared a bank holiday, leaving many families short of funds for the weekend. Long lines formed Thursday night at automated teller windows.

The anti-inflation measures were the most drastic since March 16, the day after President Fernando Collor de Mello took office. A temporary price freeze then and decrees blocking the withdrawal of most funds in savings accounts and money market funds helped slow inflation from 84% a month in March to 7.9% in May.

Despite Collor’s efforts to reduce government spending and restrict the money supply, inflation rose the rest of the year, reaching 19% in December. January’s 20% was announced almost simultaneously with the new economic measures.

Minister Cardoso called the price and salary freeze a temporary “truce” to allow a “deepening” of Collor’s economic reform program.

“That truce for prices and salaries obviously is temporary, and the time will be that needed for an accommodation, an adjustment of the economy, and for those important reforms to effectively become the model we want for a healthy economy, a growing economy,” she said.

Officials said a one-time salary increase averaging about 25% will be granted in February to compensate for past losses in purchasing power. In the future, salaries will be readjusted only twice a year, in June and December.

Despite the freeze, utility and fuel prices will be raised immediately because they lagged inflation, officials said. Fuel will go up 47% and electricity 60%. One official said that will increase the cost of living an estimated 4% to 5%.

The National Treasury Bond index and other official indexes will be eliminated. Earnings on savings will be determined by a new “referential interest rate” that Cardoso said will be an average of commercial bank interest rates.

She said Brazil’s “overnight” money market, used by the government as a source of short-term credit, will be replaced March 1 by new financial funds operated by private banks. Those funds will be used to finance government indebtedness as well as long-term industrial development bonds and social development programs, she said.

According to Cardoso, the high inflation rates of recent months were caused by abusive pricing in the private sector. Some independent economists, however, say that the government’s failure to make long-term reductions in its spending and the practice of irregular monetary controls contributed to the inflation. For example, they say, the government increased the supply of money by 58% in December.