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Inflation and its dynamics.
Every Brazilian has felt this. You go to the grocery store, pay more for health insurance, see your rent go up, feel the cost of living tighten, and then read that the country's official inflation was 4.5%.
The reaction is almost always the same: “That’s impossible. In my world, everything went up much more than that.” And, in practice, that perception makes sense. Not necessarily because the IPCA is “wrong,” but because it measures something different from the inflation you feel in your daily life.
This is the central point. The IPCA does not measure the inflation of your life. It measures the average price variation of a theoretical consumption basket. It is a statistical average. And statistical averages rarely reflect individual reality with precision. Someone who pays for private school, health insurance, and rent feels one type of inflation. Someone with a different consumption structure feels another.
Everyone lives in the same country. No one lives exactly the IPCA.
This is the first reason for the discrepancy. But there is a second one—and it is deeper. It is the difference between what the index measures and what different economic schools understand as the true origin of inflation. This is where two distinct ways of viewing the same problem emerge: linear theory and non-linear theory. While one interprets monetary expansion as a directly inflationary factor, the other understands that its effects depend on the economic context, credit, demand, and the velocity of money circulation.
To better understand this difference, see the comparison below:
Notice that in practice, the difference is simple. The linear view looks at the price and asks:
“How much did it go up?” And the non-linear view looks at the system and asks: “What caused it to go up?”
This difference seems subtle. But it changes everything.
In the linear view, inflation is the result.
In the non-linear view, inflation is the process.
What each school is actually observing
The linear view is the official reading. It is the logic used by governments, central banks, and much of traditional macroeconomics because it observes price behavior and measures inflation based on that. It is a useful reading, but limited to the final effect.
The non-linear view, on the other hand, attempts to observe the mechanism that precedes the price. It starts from a more structural logic: inflation does not begin when the price rises, but when the currency loses quality.
Milton Friedman popularized the idea that inflation is, in essence, a monetary phenomenon. Ludwig von Mises and Friedrich Hayek deepened this reading by treating inflation as a consequence of monetary expansion and credit distortion. In this view, when the price goes up at the supermarket, the inflation has already begun.
It began when there was monetary expansion. When there was credit expansion, when more liquidity entered the system, and when more money began competing for the same base of goods, services, and assets. The price is just the final stage.
Why the IPCA always seems “behind”
This is where the feeling of a disconnect between the official index and real life comes from. The IPCA measures the final manifestation of inflation, not its origin. It records the moment when the pressure has already reached consumer levels, but before that, this pressure has often already passed through other areas:
- financial assets
- real estate
- credit
- services
- cost of living
Only then does it appear clearly in the official index, which is why so many people feel inflation before they see it in the IPCA. It is not that the index is necessarily false, but that it measures the final stage of a process that began earlier.
Where M1 comes in
This is where M1 becomes relevant. M1 is a monetary aggregate that measures money with immediate liquidity in the economy: paper currency in circulation and demand deposits. In simple terms, it helps answer a question more important than “how much have prices risen?”, which is the following: how much liquid money is circulating in the system?
For those who view inflation through a monetary lens, this is a much more sensitive metric. Because when M1 grows strongly, there is more currency circulating, and more currency competing for the same base of goods, services, and assets tends, sooner or later, to put pressure on prices. This does not always appear in the supermarket first; it often appears earlier in:
- the stock market
- real estate
- credit
- risk assets
- cost of services
This is the non-linear behavior of inflation. It does not spread uniformly; it infiltrates in layers. First in assets, then in credit, then in the cost of living, and only at the end in the official index.
What this changes in practice
For those looking to protect their wealth, this difference matters more than it seems. Those who look only at the IPCA tend to react late, but those who understand liquidity, monetary expansion, and price distortion begin to perceive inflation before it appears in the index. And that changes everything. It changes how you invest, it changes how you assess risk, and it changes how you protect your wealth.
Because in the end, preserving capital requires more than just tracking prices. It requires understanding what is happening with money before prices tell the whole story.
In scenarios of monetary expansion and the erosion of purchasing power, superficial wealth management decisions tend to lead to costly long-term mistakes. AXIOM develops independent wealth diagnostics focused on financial organization, capital protection, and long-term strategy. If you would like to discuss your current wealth structure, please get in touch for an initial conversation.
