The increase in the dollar, rising commodity prices, and a heated economy largely explain the rise in inflation in Brazil in 2024. On Friday (January 10), the Central Bank released a letter explaining why the Broad Consumer Price Index (IPCA) exceeded the upper limit of the target last year, reaching 4.83%.
For 2024, the National Monetary Council (CMN) set the inflation target at 3%, with a tolerance band of 1.5 percentage points up or down. This meant that inflation could reach up to 4.5% without the Central Bank needing to send an explanatory letter to the CMN president, who oversees the inflation target system.
According to the document, the main factors behind the deviation of 1.83 percentage points from the 3% inflation target were imported inflation, the carryover effects from the previous year, the output gap—when the economy operates above its capacity—and inflation expectations.
In the category of imported inflation, the main driver was the rise of the dollar, followed by the increase in commodity prices. The Central Bank noted that commodities did not contribute significantly to the breach of the target mainly because international oil prices fell by 5.4% last year, which reduced the deviation from the center of the target by 0.59 percentage points.Currency Devaluation
Regarding the dollar, the Central Bank’s letter attributed most of the currency devaluation to domestic factors. The document highlights that the Brazilian real depreciated more significantly (19.7%) in 2024 than the major currencies of other emerging markets. During the same period, the Turkish lira fell by 16.8%, the Mexican peso by 15.3%, the Chilean peso by 10.9%, and the Colombian peso by 10%.
“Domestically, the perceptions of economic agents about the fiscal scenario significantly influenced asset prices and expectations, particularly the risk premium, inflation projections, and the exchange rate,” stated the Central Bank in its letter.Domestic Market
Although external factors predominated, the Central Bank noted that “strong economic activity, which exceeded expectations throughout the year, also contributed to inflation surpassing the tolerance band.” The Gross Domestic Product (GDP) grew by 3.3% in the year up to the third quarter of 2024, and the bank projects growth of 3.5% for the full year.
According to the bank, the historically low unemployment rate also contributed to inflationary pressure. In November, the unemployment rate, measured by the Brazilian Institute of Geography and Statistics (IBGE), reached 6.5%, the lowest level in the historical series.Source: Agência Brasil