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Brazil inflation rate: Will the Lula administration bring inflation down to BCB’s target?

By Fitri Wulandari

Edited by Vanessa Kintu


Panoramic view of the Christ the Redeemer statue in Rio de Janeiro.
Can Brazil’s inflation rate decline to single digits to survive political uncertainty? – Photo: Shutterstock; Marchello74

Brazil’s inflation rate cooled to an annual rate of  5.79% in December 2022 from April’s peak of 8.3% as recession fears eased oil and commodity prices, while the reduction in fuel tax helped to keep costs down. December’s inflation was also below 2021 inflation at 10.06%.

Falling inflation may bring a slight relief for President Luiz Inácio Lula da Silva who returned for a third term as Brazil’s president on 1 January 2023. Only days after his inauguration, thousands of supporters of former president Jair Bolsonaro stormed the presidential palace on 8 January, seeking to topple President Lula’s week-old presidency.

Bolsonaro lost the Brazilian general election in a nail-biting run-off in October 2022.

Inflation falling to single digits has given room for the Banco Central do Brasil (BCB), the country’s central bank, to ease its aggressive monetary policy tightening. BCB maintained the policy rate Selic unchanged in the December meeting at 13.75%.

High inflation has been part of the country’s economic history. So, will Brazil's inflation rate continue to decline to the central bank’s target in 2023? Read on as we look into the history of Brazilian inflation and the factors that may shape price growth. 

What is inflation?

Economists use the term inflation to describe the increase in the prices of goods and services over time. It also reflects the decline in the purchasing power of money. As a result, when prices rise, consumers can buy less with their money. The decline of buying power has a significant impact on the cost of living, resulting in a slowing of economic growth. 

In Brazil, the inflation target is set by the National Monetary Policy (NMP). The NMP sets the year-on-year (YOY) inflation target for the Extended National Consumer Price Index (IPCA), as measured by the Brazilian Institute of Geography and Statistics (IBGE).

The inflation rate is the percentage change in the cost of the IPCA’s basket of goods and services over a given time period. The IPCA adjusts the average consumption habits of Brazilian families earning between 1 and 40 minimum wages per month. The basket includes transportation, food, education, clothing, housing and healthcare.

The inflation rate target is adjusted annually. The target for 2022, for instance, was 3.50%, with a tolerance interval of 2% to 5%. The 2022 inflation target was lower than the target of 3.75% in 2021 and 4% in 2020.

Brazil’s central bank will hike or cut its benchmark Selic interest rate to meet the inflation rate target.

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Brazil’s history of inflation

Brazil 25-year inflation rate

For decades, Brazil has experienced high inflation. According to the World Bank, the country suffered hyperinflation – when prices increased by 50% a month – from 1990 to 1994. In 1990, annual inflation averaged 2,947.7%. It dropped to 432.8% in the following year, before gradually surging to hit 2,075.9% in 1994.

The 1990s hyperinflation forced consumers to rush to supermarkets as soon as they received their paychecks and spend their money before prices skyrocketed. Sometimes supermarkets would change the price tags three times a day, according to BCB’s account of the period.

Data from economic data provider Trading Economics showed the inflation rate in Brazil averaged 318.68% from 1980 until September 2022. Brazil’s annual inflation hit an all-time high of 6821.31% in April 1990 and a record-low of 1.65% in December 1998.

According to the paper written by Miguel A. Kiguel and Nissan Liviatan, Stopping Three Big Inflations: Argentina, Brazil, and Peru, Brazil’s long history of inflation is rooted in large budget deficits and the growth of the public sector. 

Fast-forward to 2020, the inflation rate in Brazil dropped to 1.88% in May 2020 during the onset of the Covid-19 pandemic. Lockdowns slowed the global economy and pushed down commodity prices, including iron ore and oil, Brazil’s main export commodities.

Inflation in Brazil started to climb in June 2020, reaching 4.51% by December 2020. The inflation rate did not show any signs of slowing by 2021, hitting 6.1% in March, which prompted the BCB to hike its Selic rate for the first time since July 2019 to 2.75%. 

In December 2021, inflation reached 10.18%, exceeding the 3.75% target. The BCB raised interest rates seven times in 2021, bringing the Selic rate to 9.25% in December.

The annual inflation rate rose to 10.38% by January 2022 and continued to accelerate to peak at 12.3% in April. Inflation has gradually stabilised since then, falling to 8.73% in August as prices, particularly for transportation, continued to decline. 

However, the inflation rate in Brazil still exceeded the 2022 inflation target of 3.5%. The stubbornly fast price growth prompted the BCB to hike the Selic rate by 50bps to 13.75% in August. BCB kept the Selic rate unchanged at 13.75% in the December meeting.

Energy costs fall, food and personal care prices fuel inflation

In December, transport costs recorded the biggest drop in Brazil’s Consumer Price Index (CPI) basket, decelerating by 1.29%.


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Easing crude oil prices as many countries entered recession combined with tax cuts on fuel prices introduced by Bolsonaro last year has reduced transportation costs. 

Fuel prices had been the main contributors to Brazil’s soaring inflation rate in the first three quarters of 2022. Russia’s invasion of Ukraine boosted already elevated oil and gas prices, increasing inflationary pressures in Brazil. 

Health and personal care, as well as the food and drinks group, recorded the fastest price rise in December, which contributed to keeping Brazil’s inflation rate above BCB’s target of 3.25% for 2022. 

Health and personal care prices gained the most by 1.6% boosted by the increase in the prices of personal hygiene, particularly perfume (9.02%), according to Brazil’s statistics office IBGE.

Juan Manuel Herrera, Scotiabank’s senior economist wrote in a note on 10 January:

“Today’s data, where services and core components saw a pick up in price gains could delay BCB rate cuts guidance until a clear month-on-month downtrend emerges. Still, the bank may soon be in a position to loosen monetary policy, kicking off its easing cycle in Q2 with about 200bps in cuts expected over the course of this year.”

Doubt about Lula’s economic policy pressure on Brazilian real

US dollar to Brazilian real (USD/BRL) 1-year chart

The Brazilian real (BRL) has appreciated recently as the US dollar has softened and BCB has kept its policy rate above the inflation rate. However, President Lula’s fiscal policy, which will focus on expanding budget-draining social welfare programs such as cash handouts and fuel tax cuts, has raised concerns. 

At its inauguration ceremony on 1 January, President Lula announced the government decided to extend tax exemption on fuel prices by another 60 days. 

Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE, at Dutch Bank ING Group said on 13 December:

“Here the incoming Lula administration is looking to break its fiscal ceiling by some BRL145/176bn to deliver on its manifesto of targeted support to the poor. Concerns over a leftward lurch in policy do seem more confined to FX than debt markets so far. We think 2023 will be a tough year for emerging markets and any policy missteps will be punished.”

The bank forecast the USD/BRL pair to trade at 6.00 in 12 months. 

Monex in its December Forex Forecast expected USD/BRL to stand at 4.80 in 12 months by 30 November 2023:

“Should the fiscal rules be scrapped or re-designed to accommodate these policy proposals, the reality is likely to continue underperforming EM and LatAm peers as investors remain cautious around the nation’s economic outlook,” Monex wrote in the report.

Fitch Ratings on 31 October 2022 projected the country’s budget surplus to flip to a 1% of gross domestic product (GDP) deficit in 2023 on a cyclical ebb in revenues, tax cuts and spending measures, including the possible extension of increased Auxilio Brasil social benefits.

Brazil inflation rate forecasts: 2023 and beyond

The Brazilian financial market raised Brazil’s inflation forecast for 2023 to 5.36% in the weekly Focus Survey on 6 January, from 5.31% in the previous week and 5.08% four weeks ago. The Focus Survey, held by BCB, polls expectations from 140 institutions.

The survey participants expected the inflation rate in Brazil to average 3.7% in 2024 and 3.30% in 2025. 

Economic data provider Trading Economics forecast inflation in Brazil at 4.45% by the end of the first quarter of 2023, dropping to 3.5% in 2024. 

In its latest Brazil inflation rate forecast on 12 December, ABN-AMRO increased its projection for the 2023 Brazil inflation rate to 9.3%, from 5.1% in its October forecast. The bank forecast Brazilian inflation to ease to 4.3% in 2024.

Scotiabank’s Brazil  inflation expectations projected the country’s inflation average 5.6% in 2023, easing to 4.2% in 2024.

The bottom line

Analysts mentioned in this article expected the current inflation rate in Brazil to continue its downward trajectory to as low as 3.30% in 2025, according to a survey conducted by Brazil's central bank BCB.

Keep in mind that analysts' opinions can be wrong. Brazil inflation forecasts from analysts should not be used in place of your research. Before trading or investing, always conduct your due diligence. And never trade money that you cannot afford to lose.


What is the inflation rate in Brazil?

The current inflation rate in Brazil is 5.79% for December 2022.

Is inflation expected to go down?

Most analysts expect ABN-AMRO forecast inflation in Brazil to go down over 2023 and 2024. Meanwhile, ABN-AMRO expected inflation to rise to 9.3% in 2023 before dropping to 4.3% in 2024.

What is the projected inflation rate for 2023

Participants in BCB’s survey expected inflation in Brazil to average 5.36% in 2023 while Scotiabank saw the inflation rate to average 5.6%.

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