Brazil’s inflation rate unexpectedly spiked in May, ending a seven-month trend of slowing price increases. Policymakers now face increased pressure to maintain interest rates stable at the next meeting after data revealed a 3.93% year-over-year price surge, slightly above analysts’ expectations.
Central Bank is anticipated to halt its monetary easing campaign to combat rising prices, potentially tolerating more inflation under the current administration. Although service prices exceed central bank limits, they are not increasing significantly despite a tight labor market.
Rising inflation expectations, influenced by currency weakness and fiscal concerns, have increased the likelihood of a rate hold at the upcoming monetary policy meeting. The recent inflation bump in May, attributed to severe flooding in a key agricultural region, also impacted core inflation, which excludes volatile items.
As consumer price forecasts climb, the government may implement more fiscal stimulus to counter an economic slowdown, potentially causing sustained high borrowing costs. This strategy has created a divide between inflation hawks and advocates for looser policies to promote growth since the central bank began its easing cycle in August.