The largest contribution to February’s inflation print came from education, with many schools and universities raising fees ahead of the start of the academic year in February.1 Food and beverages prices also made a significant contribution, with rising food prices reflecting the impact of El Niño on agricultural production.2
The BCB will take some comfort in the temporary nature of these inflationary pressures. The inflation data are not seasonally adjusted and the increase in education fees is highly unlikely to be repeated until February 2025, meaning it will add little upward pressure to annual inflation rates in the next 11 months. In addition, the Monetary Policy Committee (Copom) has already incorporated food price increases due to the El Niño phenomenon into its projections.3 Copom expects inflation to average 3.5% in 2024 and 3.2% in 2025 as the lagged impact of restrictive monetary policy weighs on demand.
As shown in Chart 1, markets also expect inflation to decline towards the target range over the course of 2024. The BCB monitors market expectations through its ‘Focus Survey’ to gauge sentiment on a number of macroeconomic variables.4 While it will be of some satisfaction that inflation expectations at 3.8% for 2024 are similar to the BCB’s projection, the central bank has highlighted concern about longer-term inflation expectations being partially unanchored. Markets expect inflation to average 3.5% every year from 2025 to 2028, above the BCB’s central target. Thus, the BCB is likely to maintain a restrictive policy stance until inflation expectations converge fully to the 3% target. It is worth nothing that inflation expectations are often influenced by current inflation prints meaning expectations could converge to target in tandem with inflation.
The International Monetary Fund expects Brazil’s gross domestic product (GDP) to grow 1.7% in 2024, slowing from the 2.9% expansion registered in 2023.5 However, at its January meeting, the BCB highlighted the potential for economic activity to be bolstered by an increase in the minimum wage which in turn would support domestic demand.6 Furthermore, the resilience of the US economy and the potential for China to grow at a similar rate this year as last could also support Brazil’s GDP growth as these are Brazil’s main trading partners.7 Although the BCB still expects economic activity to slow, Purchasing Managers' Index (PMI) data so far this year point to upside risks to this view (see Chart 2).