Income and Demand Policies in Brazil

This chapter is divided into four main sections. In section 3.2 are presented three different ways to correct the continuous loss of purchasing power of wages in an inflationary environment. We concentrate our attention on the two mechanisms that have been used in Brazil: The ‘peak adjustment’ and the ‘average adjustment’. In the former case, wages are corrected, taking into consideration only past inflation. In the latter, future inflation must be forecast to permit the calculation of the nominal wage adjustment necessary to keep its purchasing power at the previous prevailing value. These different methodologies lead to completely different situations with respect to combating inflation, and are a key step in understanding the inflationary process in Brazil. The ‘peak adjustment’ is generally referred to in the literature as lagged (backward-looking) indexation. The ‘average adjustment’ is better defined as an incomes policy than as a method of indexing wages. It also is referred to as ‘forward-looking indexation’.