Inflation in the United States and Interest Rates in Brazil

BRAZIL ECONOMICS - Report 15 Apr 2024 by Alexandre Schwartsman, Cristina Pinotti, Paula Magalhães and Diego Brandao

Inflation in the United States has been more persistent than expected according to CPI data disclosed last week, which indicated a continued acceleration trend, especially in core measures. The worsening of the underlying measures of US inflation has occurred against a backdrop of heated economic activity and a tight labor market, whose normalization tendency was not indicated by the latest payroll and JOLTS (job openings) metrics.

Based on this situation, the market now expects one or two cuts of 25 basis points in the fed funds rate until year-end, and attributes a greater likelihood that the Fed will only begin monetary easing in September. The changes in expectations pushed up long-term interest rates in the United States and caused the dollar to strengthen more, continuing the appreciation pattern observed since the start of the year. Although there is no direct connection between the increase of interest rates in the US and the conduction of monetary policy in Brazil, the stronger dollar adds a new risk of higher inflation.

Inflation in March, which was lower than expected and indicated deceleration of the core rates, was still pressured by the prices of underlying services, while the index has benefited from the benign behavior of the prices of manufactured goods. However, an additional depreciation of the exchange rate can increase the pass-through of international prices, with effects on the prices of goods, facilitated by a setting of expanding demand. These new risks have limited the room for monetary easing by the Central Bank consistent with meeting the inflation target.

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