Brazil fights to ward off return of hyperinflation

The Brazilian government has initiated a campaign to prevent companies introducing big price increases in response to the devaluation of the currency.

The armoury of weapons the government is threatening to use ranges from fines of up to 3 million real ($2 million) to public humiliation, as it tries desperately to ward off a return to its high-inflationary past.

The real came under renewed pressure yesterday, although it had recovered by mid-afternoon to 1.72 to the dollar, its closing price on Thursday evening.

The real has now devalued 30 per cent since the government abandoned its crawling peg against the dollar last week, prompting fears that inflation would return to Latin America's largest economy.

The Justice Ministry has set up a freephone line for consumers to complain about steep price increases and a group of 20 officials are to monitor inflationary pressures. Under Brazilian law the ministry can fine companies anything between 200 million and 300 million real for introducing "abusive" price increases.

Ms Eliane Thompson, head of the ministry's economic rights units, said the government would also publicise instances of companies raising prices. "One of the gains from getting rid of inflation is that consumers now have a notion of what is expensive and what is cheap," she said.

Embratur, the government's tourism department, said it would monitor airlines and hotels to ensure they did not "dollarise" their prices. Although airlines have not increased their official fares in the last week, travel agents said that they had withdrawn most of the special offers of 50 per cent or more reductions.

Ford and General Motors received a storm of criticism this week when they announced price rises of up to 11 per cent. GM has since scaled back the increases.

Some critics believe the government is adopting a too heavy-handed approach. "This sort of aggressive rhetoric is very dangerous," said Mr Alexandre Barros, a political analyst. However, Ms Thompson said: "There is no question of us returning to strict price controls."

Mr Josmar Verillo, chief executive of Industrias Klabin, one of Brazil's largest paper companies, said a company could not carry on without passing on price increases. "You cannot bankrupt companies by putting the burden on them," he said.

Fears that the currency would continue to weaken pushed share prices in Brazil down 3.3 per cent and the price of the C-Bond, the most liquid Brazilian Brady, 3.7 per cent lower.

European shares were dragged lower by worries about Brazil, with investors worried that the sharp fall in the real would have knock-on effects in the rest of Latin America. The transnational FTSE Eurotop 300 index fell 2.8 per cent while the DAX in Frankfurt and the CAC 40 in Paris dropped 3 per cent and 3.2 per cent respectively. Brazil also weighed on sentiment at the start of trading on Wall Street, with the Dow Jones Industrial Average finally closing 143.41 points off at 9,120.67.