Inflation's fuel is not just fuel prices

BRAZIL ECONOMICS - Report 04 May 2026 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

The inflation outlook is shaped by both the external shock associated with the situation in the Middle East and the deterioration of underlying inflation measures. The acceleration of core inflation and underlying services, combined with broader diffusion, signals that price pressures reflect persistent domestic factors, such as a positive output gap, a still-tight labor market, and fiscal and credit policies that support consumption. Even so, Copom's baseline scenario continues to project a slowdown in activity over the course of 2026. Against this backdrop, an additional 0.25 p.p. cut at the next Copom meeting appears more likely than holding the Selic rate steady, although the current juncture should put the committee in a difficult position. The continuation of the cycle beyond that point is even more uncertain and will depend on the behavior of oil prices.

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