How inflation works and how to stop it, lessons from Brazil : Planet Money Inflation can be one of the scariest forces in the economy. As prices rise and your dollar doesn't go as far, you feel poorer, and it's all out of your control. To better understand inflation, we turn to the story of Brazil, where, in the 90s, hyperinflation threatened to derail the whole economy until the country turned to a group of unlikely heroes: four drinking buddies. | Subscribe to Planet Money+ in Apple Podcasts or at |At this Summer School, phones ARE allowed during class... Check out this week's PM TikTok! | Listen to past seasons of Summer School here.

Planet Money Summer School 4: Inflation & Drinking Buddies

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Hello, and welcome to PLANET MONEY Summer School, your one-stop shop for learning about all things economic. I'm Stacey Vanek Smith. And climbing our way out of the caves of macroeconomics, I'm joined by our two economic spelunkers - I don't know why I wrote it this way, but I did - Kristen Broady and Luigi Zingales. Hey, guys.



SMITH: This is Episode 4 of Summer School. And today's topic is one that is very familiar to most of us - prices, how much stuff costs. And this might not sound like such a big deal, kind of small potatoes, but it is a really big deal. Because if prices start rising or falling a lot, it can create a spiral that can destroy a whole economy. One of the big worries that economists and politicians have about the economy is always inflation, which is just prices rising across an economy. But specifically, people worry about an inflationary spiral. Kristen, Luigi, would one of you mind jumping in and defining what an inflationary spiral is?

BROADY: I've got the definition.

SMITH: Go, Kristen, go.

BROADY: So it's a situation where price increases. And then wages increase because people need more money to be able to pay the higher prices. And so then, we see prices increase again. And it just goes on and on.

SMITH: And this is what is known as the dreaded wage price spiral. So basically, prices start going up. People start asking for higher pay to be able to afford to pay those higher prices. And then, companies start paying out more in wages to their workers. And so they raise prices on the stuff they sell to help pay for those higher wages, etc., etc. And this spiral is considered to be a true economic monster when it really gets going. This really strikes fear into the hearts of economists and politicians. Luigi, why is this?

ZINGALES: I think that a high level of inflation, especially an expected inflation, create a lot of social unrest because there is a massive redistribution of income in the economy. And that is generally quite disruptive. So inflationary spiral, if it keeps rising, then, you lose confidence the currency you're using. And as savings becomes dramatically reduced - and long-term planning becomes extremely difficult and so on, so forth. So the disruption in the economy can be substantive especially when you enter the double-digit inflation range.

SMITH: Or even more than double digits. So when inflation spirals out of control, it can lead to what is known as hyperinflation. Hyperinflation is when prices are rising at a rate of a thousand percent or more per year, which means, for example, that, like, a $3 coffee would cost more than $33 by the end of one year. And we've never experienced anything like that in this country, thank goodness. But countries all over the world have suffered this. And when it happens, it is just a terribly destructive force. And we, in fact, are about to hear a story about hyperinflation and the terrible effects it had on the people and the government of Brazil. Kristen, Luigi, is there anything that people should listen for with this story?

BROADY: Yeah, it's important just to think about how much time and how much money had to be invested to come up with different ways to try to deal with inflation and just how they had people think about the value of their money so that they didn't lose faith in the economy.

ZINGALES: The other thing that I would like them to listen for is this aspect that inflation, by a certain extent, is a self-fulfilling prophecy because the definition of inflation is a lot of money chasing a limited amount of goods. And if you expect prices to go up, then you rush to buy the goods today. And that tends to push the prices up even more.

SMITH: Also, like you say, Luigi, it is always so fascinating to me the psychological element of inflation because one of the ingredients of an inflationary spiral, which is inflation getting out of control, is people thinking that they're in an inflationary spiral. And in fact, that is a big part of the story that we are about to hear. It is about hyperinflation in Brazil from the '80s and '90s. It was reported by Chana Joffe-Walt back in 2010. And we'll hear that right after the break.


CHANA JOFFE-WALT: Fifteen years ago, money basically had no value in Brazil. The inflation rate in Brazil in 1990 was about 80% a month. So imagine just going to the store. Like, one day, eggs will cost a dollar in the store. And then tomorrow, they would be $1.02. And the next day, they'd be $1.04. By the end of the month, they would have almost doubled. And by the end of the year, if inflation continues, eggs would be $1,000. So that was what things were like in Brazil in the 1980s and the early '90s. And it is what they would still be like right now, today, if it were not for some unlikely heroes, the most unlikely group of national heroes you can imagine - four former drinking buddies from grad school with a crazy plan who are suddenly put in charge of the country's biggest economic crisis ever. But before we meet them and hear their story, let's paint a picture of the problem that they set out to solve.

So remember, prices were going up every day in the '80s and early '90s. And if you think about what that actually means in the supermarket, they had to change prices every day. Gaetano Ferrari (ph), this flirtatious 75-year-old in Sao Paolo that I met, remembers that that was someone's job, to walk the aisles and change the prices.

GAETANO FERRARI: There is a guy who changed the sticker - (imitating sticker placement). You pass the guy, and you buy things.

JOFFE-WALT: You would walk by the guy? You would, like, get in front of him?

FERRARI: You run...

JOFFE-WALT: In front of him.

FERRARI: ...In front of the guy, and buy things like that.

JOFFE-WALT: So that you could get to the goods before he changed the price.

FERRARI: Yes, like that.

JOFFE-WALT: Inflation was a pain for people who shopped in stores, as well as for people who ran those stores. Because the problem is you can only possibly know that inflation was 80% a month in retrospect. At the time it's actually happening, you have no idea.

This is one of the pernicious effects of sustained high inflation. You assume because prices were going up in the past, that they're going to continue going up in the future, but you don't really know how much. How much do you tell the sticker man to raise prices by?

So every business in Brazil had to develop different strategies. So some people just set a number for what prices will be. They just said prices will go up 2% every day. Other store owners would go and, like, just peek in the store down the road and see what their prices were and copy them. And others would look at the exchange rate with the dollar.

So people like Isaac Workman (ph), he ran a textile factory in a row of textile businesses, and his method was looking at the exchange rate with the dollar combined with good old-fashioned collusion. Every morning, Isaac would get together with the other textile guys.

ISAAC WORKMAN: In Brazil, it's very common that you start your day having a glass of coffee. And we start talking, the weekend and how our football team has done. And then someone probably would say, how much you're going to start? Are you going to charge? What is the dollar exchange rate? And somebody else would say was 9, now it $10. And I have to increase my prices 10%. And, you know, it's not an exactly science.

JOFFE-WALT: Brazil's problems with inflation all started in the 1950s. The government wanted to build a new capital in Brasilia, and they wanted nice buildings, fancy architects, and didn't have the savings to pull it off. So it created the money to do it.

Now, this is an option countries are often tempted to take. They can print money to pay for things they can't afford. The problem, of course, is inflation. So if there is a hundred dollars in the economy and you create a hundred more, now every dollar is worth half as much. That's inflation. And in Brazil, inflation continued for the next five decades. Year after year, Brazilian money was worth less and less.

And this causes all sorts of problems, not just with the sticker man. You know, say you get a thousand-dollar bonus and you put that money in your drawer. A year later, it's worth half as much. So the minute you get paid, the clock is ticking on your money.

I talked to one man who told me he used to have nightmares about his money sitting still on his dresser, just losing value. A beer manufacturer told me he stopped making beer because making beer just takes too long. You buy all the grains and hops, and by the time it was brewed, everything was worth so much less. So by the 1980s, inflation was the No. 1 political issue, and so began the plans to fix it.

Now, it turns out the best person to talk to about this is Maria Leopoldina Bierrenbach (ph) because Maria can take you through a detailed history of each president's failed plan to stop inflation. But you have to ask Maria each question twice, because the first time, she always answers like this.

MARIA LEOPOLDINA BIERRENBACH: I don't know because I never had to do anything. I was just a plain housewife and mother.

JOFFE-WALT: And then Maria will proceed to be the most knowledgeable person you will speak to on any topic. OK. So first up, President Sarney in 1985. And President Sarney solution to inflation was simple - businesses are raising prices, make that illegal. There was a price freeze.

BIERRENBACH: And you know what happened. People hid the merchandise. And you couldn't buy anything because they wanted the prices to grow up because the situation was a fantasy. It was not real. You couldn't find the meat at the butchers.

JOFFE-WALT: Because they weren't - they just weren't buying meat to sell? Why couldn't you find...

BIERRENBACH: They hid the cattle.


BIERRENBACH: Yes, you can do that here. It's a very large country, you know.

JOFFE-WALT: So they hid the cattle waiting for the price freeze to go away.


JOFFE-WALT: The main problem with this plan, of course, is you can't just freeze prices and not deal with the underlying problem - the fact that the government is still creating money, which causes inflation. So that was the next guy's idea, President Collor in 1990. He thought, OK, I'll just stop creating so much money. Inflation will eventually go down.

Now, here is the problem with that. It has to do with the country's banks. If you were in the small minority of Brazilians who had enough money to have a bank account, it felt like a really great deal because in order to get your money, banks had to pay you an interest rate that was higher than the rate of inflation.

So in the U.S., you're lucky if you get 2% interest on your bank account. But in Brazil in 1990, people could get 2,000% or more. Money was growing in banks, which helped fuel inflation, which led President Collor to believe bank accounts were part of the problem.

And here's where he went really, really wrong. He decided to freeze bank accounts. Eighty percent of private assets, 80% of the money you have in your bank account you can't take out. Now, Maria is telling me this and my translator, Flavio Ferreira (ph), was sitting in on our conversation, and he could no longer keep quiet. He remembers when the minister of finance made that announcement.

FLAVIO FERREIRA: And I remember the day when she was on TV explaining that they were going to confiscate everybody's money. So next days, banks would not work. I remember the face of that woman. She had studied in the best schools. And she had been a professor at USP. And she was explaining to the nation as an economist why we need this to end inflation.

We need the country to be, you know, together with us. But I remember looking at her, and said, God, a government cannot do that. I mean, when a government does that, you lose people's respect.

BIERRENBACH: Oh, it was terrible, wasn't it? It was terrible. So many people committed suicide, you know.

JOFFE-WALT: When you mess with people's money, it does not go well. The economy went off a cliff. President Collor was impeached. There was a new president, a new finance minister, and inflation went back up again. The Brazilian economy was at a low point, and it looked like there was nothing to be done to fix it.


JOFFE-WALT: Enter our heroes, those four economists we talked about at the beginning, who basically entered the picture now because that new finance minister knew nothing about economics. And so in March of 1993, he called one of our heroes, Edmar Bacha.

EDMAR BACHA: Oh, I was in my office at the university here, the Catholic University. And I got a call soon after I had finished teaching a class, you know. And he said, well, I just been named the finance minister. You know that I don't know economics, so please come to meet me in Brasilia tomorrow. We need you. Well, I was terrified.

JOFFE-WALT: Bacha had been waiting three decades for this call, ever since he and his three friends had taught graduate school together at the prestigious Catholic University in Rio - four friends who had been studying Brazilian inflation for decades, four buddies at the campus bar complaining to each other about how this government didn't know what it was doing and that government didn't know what it was doing, four buddies who are now being asked by the government to come and fix things their way - the plan they'd spent years on. And so, of course, their first answer - no, we don't want to. Here's another one of the four, Andre Lara.

ANDRE LARA: This is a process. It's something that requires many years. It's not something that we can do. It's not a magic - not a trick that we do overnight.

JOFFE-WALT: The government pressed on. Lara and Bacha were taken to dinner with members of parliament who told them how much the country really needed them. They got calls at home. Senators told them, you will have free rein, whatever you think is best. Bacha was invited to meet the president.

BACHA: And then I ask him an autograph for my kids. And then he wrote a note for - addressed to my two kids and saying, please tell your father to work fast for the benefit of the country.

JOFFE-WALT: That's what wrote in the autograph?

BACHA: Yes, yes. I still have that note (laughter).

JOFFE-WALT: So there was a lot of pressure.

BACHA: Oh, yes. Yes. yes.

JOFFE-WALT: Bacha was eventually won over by the autograph and the finance minister's appeals. And Lara was convinced by a parliamentary dinner where the politicians assured him they'd take whatever difficult measures were needed to keep his idea pure. So here was the idea. Basically, the four economists said, yes, you have to hit the underlying causes of inflation. You have to stop creating money, but you also have to stabilize people's faith in money itself.

And this is where their plan was different. People were part of the problem, they thought, their perceptions. People had to be tricked into thinking money had value when all signs told them that was absolutely not true. So Bacha says they wrote a plan for a new currency, one that was stable, dependable, trustworthy. The only catch was this currency would not be real. It would not be printed. There would never be coins. It was fake. They called it a virtual currency.

BACHA: We called a unit of real value, URV, yes. Yeah. It was virtual, didn't exist, in fact.

JOFFE-WALT: People would still have and use cruzeiros, the local currency, but everything would be listed in URVs. Your wages would be listed in URVs. Taxes were listed in URVs. And all prices in the stores were listed in URVs. And URVs would be held stable. And so, for example, when you went to the store and bought some milk...

BACHA: How much does it cost? Say, well, now we have it costs X, let's say 1 URV. Well, how much is that? Because I cannot pay you with URV. Say, well, I have this little table here. And today's value of URV in cruzeiros is 7 cruzeiros per URV. So it costs 1 URV, 7 cruzeiros. You pay cruzeiros there. You go next week, well, it's still 1 URV. But then you say, how many cruzeiros? You look - well, 14.

JOFFE-WALT: Every night, the central bank would put out a memo with the official inflation rate of the day. And it would get printed in the newspaper the next morning so the store clerk could look it up. Monday, 1 URV is equal to 7 cruzeiros; Tuesday, 12 cruzeiros; Wednesday, 14. Milk or whatever it was you were buying would stay the same in URVs. And the idea was you would start thinking in the fake currency, in URVs, because just last week, you got paid 1,000 URVs. Milk costs 1 URV. Next month, you get 1,000 URVs again, and milk would still be 1 URV. The amount of cruzeiros, what you actually handed to the clerk, would change, but the price in URVs would not. That was the plan which Bacha presented to the senator from Sao Paolo.

BACHA: And then when I explained to him the plan, you know, he - after a while, you know, he said, well, with some anguish in his voice, said, well, Bacha, if this is the only way that you tell me that it can be done, then we'll follow you to the precipice.

JOFFE-WALT: And so the four economists went about explaining to the country that everyone now should talk in a virtual currency.

BIERRENBACH: We didn't understand what it was. We asked, how much is that? Oh, so many URVs. I used to say it was a fantasy because it was not real.

JOFFE-WALT: Still, people used it without being forced to. One store would be selling milk for 1 URV, and eventually all the stores would be, so people would know that's an appropriate price for milk, which I can tell because I got paid 1,000 URVs.

BACHA: And then when we are satisfied that prices were relatively in good synchrony, we declare, well, from this day the virtual currency becomes a real currency. The cruzeiro real is going to disappear, and everyone is going to receive from now on its wages and pay for all the prices in the new currency, which is the real, which is equal to 1 URV and also equals to $1. And that's so - that is the trick.

JOFFE-WALT: It wasn't the only trick, obviously. While they put URVs in place, the group of economists made the government balance its budget and slow down on money creation. And then one day, July 1, 1994, the central bank deployed truckloads of new cash in this new currency, the real, to banks in the cities, to provinces, and waited on the ready for the four economists to say go. All that fake money you've been using? It's now real.

BACHA: And I remember, you know, the day that we launching the real, I have this journalist who had become a friend of mine. And then she came to me and said, professor, do you swear that inflation is going to end tomorrow? I said, yes, I swear. That's going to end tomorrow.

BIERRENBACH: Everybody was very happy.

JOFFE-WALT: Our four heroes literally turned Brazil's economy in the opposite direction with their plan. Brazil was finally able to grow in the way it always should have been all along. The country was able to grow true competitive industries - huge players in sugar and oil and iron ore. And Cardoso, the finance minister who hired our four heroes after admitting he knew nothing about economics, he was elected president - twice.


SMITH: That was Chana Joffe-Walt back in 2010. And we will be back after a short break to slow walk through exactly how these economists solved the problem of hyperinflation in Brazil.


SMITH: OK. We are back with our economists extraordinaire, Luigi and Kristen. What did you guys think? Like, what went through your head while you were listening to this story?

BROADY: It takes me back to when I was working on my master's degree. I worked at Circuit City, which has now gone on. But one of the things that was our job on Saturday or Sunday, one of those days, we would update the prices. It wasn't about inflation.

SMITH: You did the - you were the pricing person.


SMITH: Oh, my gosh.

BROADY: So it wasn't drastic swings. It was just based on whatever the price was. Some of the prices of televisions or stereos or whatever it was would go up or down. And there would be customers, if they were in the store at the time of the price change, you know, they may want to make a purchase before the price went up or they may want to wait to see if it went down.

SMITH: Well, yeah. I mean, it's a less fraught version of the - of price changing than we saw, like, in the grocery store. But it's the same thing, right? It's people who want to make sure they're getting the best deal. And in the case of Brazil, when we heard - that sort of price changing was just very emotional. It came with a lot of panic and a lot of fear. And that was really, like, part of what these four Brazilian economists were up against.

ZINGALES: I think that the cleverness of these four guys, because it's pretty clear from the episode that in order to bring down inflation and to stabilize the price level, you need to intervene on the money printing. But at the same time, you need to change the expectations. And changing the expectations is something that we don't really know how to do as an economist. In a sense you have this concept of rational expectation that people should behave like we think the model behaves. That's not really what happens in the world.

You need to make something credible. And this is where psychology comes into picture. And ironically, these four economists were very good empirical psychologists at the same time as they were doing the right thing economically. Because in the episode, there was one of the four economies that said, that was asked by your friend, can you promise that inflation will not go up? And he said, yes, I promise.

SMITH: Yes. That is such a striking moment.

ZINGALES: Yeah. Because I actually hold promises in very high regard. I only promise what I know I can deliver 100%. And I think he promised when he knew he could deliver maybe 98%. And it worked. But 2% of the time, you're really a bastard.

SMITH: So I'd love to kind of, like, do a little bit of a slow walk through what happened here. So these economists, they make up a currency. They peg the Brazilian currency to this currency that they say is made up, it doesn't exist. How did this work?

BROADY: Yeah. So I think it's like - they talked about, in the episode, the price of milk, for instance...

SMITH: Yeah.

BROADY: ...Right? That if milk costs one UVI - right? - that each time you go to the store, day after day, week after week, it's one UVI. So you feel like the price isn't changing. OK, things are stabilizing, right? So everything has a UVI price. But I guess it's interesting to me because the amount of currency that you actually have to turn over is changing.

SMITH: Yes. Yes. So it's basically like the - oh, like, the - going to the grocery store. Because, Kristen, you mentioned, like, milk. Every time, it's 1 UVI. And that's such a contrast to the opening scene where this guy is, like, basically speed-walking down the aisles, changing all the prices. Where every - the price is changing, changing. It creates stability, even if that stability is fake. It's like a fake stability.

ZINGALES: I think they set the expectation differently. You need to convert. If - this is a need to coordinate because if I am the only one not rushing to buy the good tomorrow and everybody else does, I basically get my value depreciated - my money depreciated - and you don't. So in fear that you are running and I'm not, I'm going to run myself. And that's a situation that is very dangerous because everybody say, OK, I believe it when I see it happening. But before, I'm going to rush and buy my stuff. The moment you see that actually the other people are coming down is a bit like in the famous Frank Capra that you see the run to the bank.


FRANK FAYLEN: (As Ernie) I've never really seen one, but that's got all the earmarks of being a run.

SMITH: Oh, yeah, "It's A Wonderful Life." "It's A Wonderful Life." It's such an amazing movie. And, yeah, there's this - there's a moment in the movie where there's this - everybody's panicking. And they run into this bank, and they're all trying to get their money out right away. They're panicking.


ERNIE ADAMS: (As Ed) But, George, I got my money here.

JAMES STEWART: (As George Bailey) You're thinking of this place all wrong, as if I had the money back in a safe. The money's not here.

SMITH: Like, the money's in your house and your house and yours, yeah.


STEWART: (As George Bailey) And in the Kennedy house and Mrs. Macklin's house and a hundred others.

ZINGALES: Exactly. Exactly. And that helps calm down people. And it's not easy to do it, even in a small town like - what's the name of the town?

SMITH: Oh, Bedford Falls.

ZINGALES: It's not even easy to do in Bedford Falls. But in a country as large and diverse as Brazil, you really find it hard for anybody to believe anybody else.

BROADY: Yeah. I think that people want to believe. They want to know that money is going to be stable, that their earnings are going to be able to buy the amount of goods and services that they expect, and that their accumulated wealth is going to continue to be worth whatever it's worth over time. People don't want to know that the money that they worked for or the wealth that they accumulated is going to be able to buy less in the future. That's not a comfortable thought. And inflation does erode the value of dollars, right?

So people want to know that their money is going to hold some value, whether it's for retirement, whether it's for buying things in the future. They don't want to think that they've done all of this work and saved all of this money and that the money is going to be worthless.


SMITH: All right, everybody, we are almost to the end of class. Time to go over our vocabulary and our concepts. Remember, there is a test at the end of Summer School. And if you pass, you will get a genuine diploma. Can't put a price on that.

So we have got inflation. The definition of inflation is prices rising across an economy. There's also the wage price spiral. That is when prices rise and then people demand higher pay to pay those higher prices, and then companies raise their prices to be able to afford those higher wages and up and up and up. There is hyperinflation, and that is when prices are rising by more than 1,000% a year.

Before I let you guys go, we have our Spotify playlist, Econ Songs for the Summer. Are there any songs that came into your mind as you were listening to this tale of prices and inflation and policy change?

ZINGALES: I'm trying to think the - there is an Italian song of somebody going to the beach and paying always high and high prices for everything and couldn't afford to do it. Because unlike Kristen, I'm much older. So I do remember the time of two-digit inflation in Italy, and that was a pain.


COCHI E RENATO: (Singing in Italian).

SMITH: Oh, it looks like we found the song. It's called "A Mi Piace Il Mare" (ph) or "I Like The Sea." It's a song from 1969 about prices rising. They especially talk about the price of ice cream rising. Apparently it went from a hundred lira to a thousand lira.


COCHI E RENATO: (Singing in Italian).

SMITH: Kristen and Luigi, our fearless spelunking guides, thank you so much.

ZINGALES: No, thank you.

BROADY: Thank you.

ZINGALES: It was a lot of fun.

SMITH: PLANET MONEY Summer School is produced by Audrey Dilling, with help from Greg Morton. It is edited by Alex Goldmark. Engineering on this episode by Robert Rodriguez. Our project manager is Devin Mellor. I'm Stacey Vanek Smith, and PLANET MONEY is a production of NPR. Thanks for listening.


COCHI E RENATO: (Singing in Italian).

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