This side of the horizon

BRAZIL ECONOMICS - Report 25 Aug 2025 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

The appreciation of the exchange rate in 2025 has had impacts on inflation, chiefly in the category of tradable goods. It is true that much of the disinflation in this group is explained by food prices, whose behavior depends on variables beyond the exchange rate, but there are also signs of a slowdown in tradable goods excluding food. On the other hand, the behavior of inflation in non-tradable goods remains stable at high levels.

These movements are in line with what is predicted by exchange rate pass-through models, both VAR-based and the Central Bank’s semi-structural model. Despite the short-term relief, the Central Bank should not rely on the exchange rate to ensure convergence of inflation to the target, as its effects tend to be temporary and restricted to only part of the IPCA. The behavior of the output gap remains the most relevant determinant of inflation in the horizon relevant for monetary policy.

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