An estimated 3.6 million tourists will converge on Brazil to attend the World Cup in June and July. As they’ve been making their travel plans, it’s likely that they’ve been shocked by the staggering prices of almost everything, relative to American and European standards.
According to the travel website Trivago, tourists can expect to pay an average of $282 per night for lodging in São Paulo and $371 per night in Rio. Prices in the nicer hotels are in the $1,000 per night range. When they arrive, visitors won’t find $1 happy-hour beers; rather, they can expect to pay $10 for a caipirinha, a popular sugar-cane based drink. And, for dinner they’ll fork over $100 for risotto and $60 for a pizza.
Brazilians have been dealing with high prices for decades. In 1993, Brazil endured a period of extreme runaway inflation when it reached 2,400%. Although inflation has returned to a more manageable level, many would argue that 6% inflation is still high for international standards.
São Paulo is ranked by the Mercer consulting firm as the most expensive city in the Americas and the 19th most expensive city in the world, beating out New York and London. Even Rio is among the world’s 30 most expensive cities.
So, why does a cup of coffee cost more in Brazil, a coffee-producing country, than in a country that imports coffee?
High inflation is only one of the contributors to the high cost of living in Brazil. Deeply ingrained bureaucracy, a confusing tax system, high import tariffs, rising wages, higher energy prices, and other government policies all contribute to steep prices. Also, companies that are struggling to do business in Brazil pass on their costs to consumers.
Brazil’s poor infrastructure is another major contributor to the prices tourists will be paying. One reason why hotel prices are so high is because government policies supported the construction of homes during a recent housing boom that virtually ignored the deficit in hotel rooms. Also, even though air traffic has doubled in recent years thanks to a growing middle class, investment in airports has been too little and too late. Consequently, the cost to fly one-way between São Paulo and Rio booked on short notice could be as high as $514 compared to $167 to fly between New York and Washington D.C.
Economists have given this complex collection of circumstances a name: “Custo Brasil,” or in English, the “Brazil Cost.” It’s the Custo Brasil that can make the cost of goods manufactured in Brazil as much as 30% higher than those produced abroad.