The increase in the dollar, the rise in 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 range of 1.5 percentage points up or down. This meant that inflation could have reached up to 4.5% without the Central Bank needing to send an explanatory letter to the president of the CMN, who oversees the inflation target system.
According to the document, the main factors responsible for the deviation of 1.83 percentage points from the 3% target were imported inflation, the carryover effects from the previous year, the fact that the economy operated above its capacity, and inflation expectations.
Within the category of imported inflation, the main driver was the appreciation of the dollar, followed by the increase in commodity prices. The Central Bank highlighted that commodities did not contribute significantly to the deviation from 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.
Depreciation of the Exchange Rate
Regarding the dollar, the Central Bank’s letter attributed most of the depreciation of the exchange rate to internal 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%.
“Internally, the perception of economic agents about the fiscal scenario significantly influenced asset prices and expectations, particularly the risk premium, inflation forecasts, and the exchange rate,” stated the Central Bank in its letter.
Domestic Market
Although external factors were predominant, the Central Bank noted that “the strong economic activity, which exceeded expectations throughout the year, also contributed to inflation exceeding the tolerance range.” 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 ever recorded.
Source: Agência Brasil