14% Rise in August May Threaten Recovery : Brazil Inflation Hits Record High

Inflation in Brazil has surged to a historic monthly high in August, according to official figures expected to be released today, endangering economic recovery under the new democratic government of President Jose Sarney.

The national price index is reported to have risen 14% in August. Never before has it gone up more than 13.3% in one month.

The August figure means that prices have gone up by 120% in the first eight months of the year. Unless the rate is reduced in the remaining four months of the year, inflation will break through the ceiling of 200% that had been set for the full 12-month period.

This is a blow to the efforts of the Sarney government to reverse the inflationary spiral while promoting growth, a policy designed to increase production of goods and services by 5% this year.

Moreover, the rising rate of inflation creates additional problems for Brazil’s negotiations with the International Monetary Fund on a new agreement in connection with refinancing Brazil’s $100-billion foreign debt. Brazil wants to refinance over 15 years that part of its debt that is to come due between now and 1991--about $45 billion.

The IMF has been calling for stronger anti-inflation measures as a condition for financial help. The Sarney government has refused to impose austerity measures, which in the view of Sarney’s economic advisers would produce a recession.

Cabinet Shake-Up

Critics of the government’s policy, which was designed by the minister of planning, Joao Sayad, said the upsurge in inflation shows that the cost of economic expansion is higher prices, unless the government cuts back on public deficits generated largely by high spending and lack of economies in state enterprises.

A Cabinet shake-up this week brought in Dilson Funaro, a Sao Paulo industrialist, as finance minister in place of Francisco Dornelles, a tax expert. The change was not brought on by the failure of anti-inflation measures but by differences between Sayad, a proponent of economic growth, and the finance minister, who had been calling for austerity.

In New York, meanwhile, a bank official disclosed that Funaro and other new economic officials have assured Brazil’s international commercial banks that they support the terms of an agreement worked out by their predecessors to extend until January about $16 billion in credit lines for trade and deposits with Brazilian financial institutions. The extension also was said to cover payments on principal due between now and January, under an agreement worked out earlier this month.

The August inflation confirms the diagnosis of fiscal and monetary conservatives who said that price controls on food, basic industrial commodities such as steel and public services were only disguising the underlying inflationary pressures.

Funaro said on taking office Tuesday that the government must learn to spend more efficiently. But he said the main priority is still economic growth, not a balanced budget.

This is also the general preference of private businessmen and bankers, who think that anti-inflationary monetary and credit policies will produce recession, unemployment and business failures.