WES 2025: Gustavo Franco’s war on inflation

Recently, inflation has been rife across the globe. In the UK, price growth peaked at 11.1% in October 2022. This may have hurt our pockets, but in the grand scheme of history, this was but a drop in the ocean.

Brazil’s cumulative inflation from April 1980 to May 1995 was 20,759,903,275,651%. This is one of the largest bouts of inflation the world has ever seen. A typical example of hyperinflation is the Weimar Republic (Germany) in 1922-23, where inflation was cumulatively 10,115,776,266% across 16 months. To put these numbers into simpler terms, Brazil’s inflation reached 20.76 trillion per cent across 15 years. Meanwhile, Germany’s was 10.12 billion per cent.

However, Brazil’s inflationary spiral eventually ended. This was partly due to Gustavo Franco, the former Governor of the Brazilian Central Bank and regarded as one of the founding fathers of the ‘Real Plan’ – a monetary reform in 1994 that ended hyperinflation. Franco gave an address at the Warwick Economics Summit this year, discussing the challenge of Brazilian hyperinflation, the Real Plan, and its aftermath.

Firstly, how did Brazil’s inflation spiral out of control?

In the Brazilian government, there was one of the “worst cases ever” of denialism over inflation

In the Brazilian government, there was one of the “worst cases ever” of denialism over inflation. Franco noted that the word ‘hyperinflation’ was “forbidden”, saying it was seen as causing bad luck as Brazilian policymakers argued that the hyperinflation was normal — it was merely a result of the economy growing so quickly. However, what hyperinflation really was attributable to was excessive money printing and large government deficits. They believed that they did not have a problem, as to reduce inflation, they would have had to make the politically tricky choice of reducing government spending.

Despite this, the government did somewhat try to fix it. They found the “easy solution, but a wrong solution” in the form of price freezes. Starting in 1986, they implemented an asset freeze and five price freezes in five years, each failing to fix inflation. It would always have the same effect — inflation would temporarily fall, but then it would come back even stronger. This was due to people expecting it to fail, along with the difficulty of enforcing it in informal markets. 

After Fernando Collor de Mello was impeached in late 1992, Vice President Itamar assumed the presidency and oversaw the implementation of the Real Plan. Fiscally, the plan involved curbing government spending, generating a primary surplus worth 4.3% of GDP that year. They also ended excessive money printing. In addition, they tightened monetary policy with a real interest rate of 27% and implemented an initial freeze on public sector prices.

Furthermore, they introduced the new ‘Real’ currency, partially linked to the US dollar. Before this, though, Brazil implemented a step-by-step solution where everything was priced with the Real Unit of Value (URV), which is not a currency but a price reference. Yet, you still paid for goods with the old Cruzeiro real currency, which still rapidly lost value. Consumers became accustomed to stable URV prices, and so, when the government announced that one URV was now one ‘Real’, people adapted quickly.

This was clear when inflation fell from 10,000% the year before to just over 100% a year after the first month of introduction. Annual inflation gradually fell to just 1.7% in 1998 – lower than in the USA.

The Real Plan was a great success that helped stabilise Brazil and allowed for economic growth

Franco called this “the largest social programme the country has implemented ever” as inflation is regressive. The rich could invest in assets to maintain their wealth. Meanwhile, low-income households lived paycheck to paycheck, with inflation eroding the value of their wages and savings.

Near the end of his speech, Franco discussed the ‘New Economic Matrix’, a government policy involving fiscal stimulus policies like tax cuts and a more lenient monetary policy, along with the devaluation of their real to boost exports. They did this in response to slowing growth. However, Brazil then suffered an economic crisis spanning 11 consecutive quarters between 2014 and 2016. The policy originally provided a temporary boost, but inflation surged, forcing the government to increase interest rates, and foreign investors lost confidence.

Overall, the Real Plan was a great success that helped stabilise Brazil and allowed for economic growth after subduing one of the most rampant inflations in history. So, next time you see Freddo prices rise again, just remember that at least inflation isn’t at 1980– 95 Brazil levels.