The official inflation figures released Thursday (Jul. 10) show Brazil has broken through the ceiling of the inflation target for the first time since the National Monetary Council changed the way the accumulated increase is calculated, early this year.
Before this alteration, the inflation target had already been breached eight times.
The target set by the council for a 12-month time range is three percent, with a tolerance of 1.5 percentage points more or less. The ceiling, therefore, is 4.5 percent, and accumulated inflation should not exceed this level for six consecutive months.
As Brazil’s consumer price index IPCA—which is used to gauge the nation’s official inflation—stood at 0.24 percent in June, the sum of 5.35 percent over 12 months was the sixth consecutive rate above 4.5 percent.
Inflation accumulated over 12 months (IPCA)
| January | 4.56% |
| February | 5.06% |
| March | 5.48% |
| April | 5.53% |
| May | 5.32% |
| June | 5.35% |
In the price surge recorded in June for the 12-month period, the group of products and services that stood out the most was food and beverages—up 6.66 percent.
Change in the target regime
Established in 1999, the inflation targeting system worked until 2024 considering only the result closed for each year, from January to December. In this way, the target was only considered to be breached if the IPCA surpassed the tolerance interval in December.
In 2023, a resolution from the National Monetary Council determined that, from 2025 onwards, the target should be calculated using a standard that follows international standards, known as “continuous target.”
As such, the verification range moves over time and is no longer restricted to the month of December each year.
The council is made up of the ministers of Finance and Planning, as well as the president of the Central Bank, whose Monetary Policy Committee is tasked with managing IPCA’s calculation.
The use of the continuous target is said to prevent temporary variations in inflation from being labeled as noncompliance. Such is the case, for instance, when a shock in food or oil prices is observed, which cause inflation to fall outside the tolerance range for just a few months.
Open letter
Whenever Brazil breaches the inflation target, the president of the Central Bank must publish an open letter to the Minister of Finance detailing the causes of the breach, the measures to be taken to pull inflation black, and when they should take effect.
In addition to the first half of 2025, inflation fell outside the tolerance range in 2001, 2002, 2003, 2015, 2017, 2021, 2022, and 2024.
Of the nine episodes, only 2017 was below the floor, when the IPCA ended the year at 2.95 percent, below the three-percent minimum target.
In 2002, when the target ceiling was 5.5 percent, the IPCA reached 12.53 percent—the highest since the implementation of the monetary regime. In 2021, the year with the effects of the pandemic, it reached 10.06 percent.
Why pursue the target?
The inflation targeting regime outlines the set of procedures aimed at guaranteeing price stability in the country.
“The target provides greater certainty about the direction of monetary policy, making the Central Bank’s commitment to price stability transparent to society,” the Central Bank says.
If, on the one hand, the target sets a ceiling for price rises, on the other, it also determines that it should not be too low.
Very low inflation or deflation (falling prices) can also be bad for the economy, since, if constant, it creates a vicious circle that drives away consumption (people may avoid making purchases in the expectation that prices will sink further down) and has a negative impact on economic growth and job creation.
The effect of interest rates
The main way the Central Bank controls inflation is through the economy’s benchmark interest rate—the Selic. Raising the rate makes loans more expensive and slows down economic activity, which has the potential to contain price hikes. On the other hand, it discourages investment as well as the creation of jobs and income.
The Selic rate is set by the Central Bank’s Monetary Policy Committee at meetings held approximately every 45 days. The Selic is currently at 15 percent a year—the highest point on the upward trajectory that began in September 2024. Central Bank President Gabriel Galípolo has said that the Selic should remain high for a long time, until it manages to push inflation within the target.
Crédito arquivo Nacional EBC
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