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30 July 2026, 20:20 UTC Chief Investment Office GWM Investment Research

Has Brazilian inflation become more inertial? Blog Solange Srour, Head of Brazil Macroeconomics, UBS Brasil Administradora de Valores Mobiliarios Ltda Debora Nogueira, Economist - Chief Investment Office Brazil, UBS Financial Services Inc. (UBS FS) Victoria Brant-Roquetti, Research & Analysis Associate, UBS Brasil Administradora de Valores Mobiliarios Ltda

• Evidence of greater persistence in inflation dynamics • Empirical result • Economic interpretation and implications for monetary policy

Evidence of greater persistence in inflation dynamics The year 2026 is expected to mark the third consecutive year in which inflation, as measured by the IPCA, remains uncomfortably above target. Even after one of the most intense monetary tightening cycles since the adoption of the inflation-targeting regime, disinflation has remained gradual and incomplete, while expectations have stayed above target across different time horizons. At the same time, economic activity has proved more resilient than expected, limiting the slowdown in demand and contributing to sustained inflationary pressures throughout the cycle.

The central argument of this study is that Brazilian inflation has not only remained elevated due to a succession of recent shocks, but has also become more inertial. This change is reflected in three complementary dimensions: a greater role for past inflation in the Phillips curve, statistical evidence of instability in this parameter, and the more persistent transmission of food and fuel shocks to core inflation.

One possible explanation for this behavior is the succession of shocks that has affected the economy in recent years. The pandemic, disruptions to global supply chains, geopolitical conflicts, and volatility in food and energy prices affected inflation in virtually all economies. However, as some of these shocks were gradually absorbed, Brazilian inflation continued to struggle to converge toward the target, suggesting that the problem is related not only to the magnitude of the shocks, but also to the way their effects began to propagate.

High inflation and persistent inflation are not equivalent concepts. A temporary shock can raise inflation without altering its transmission mechanism, allowing its effects to be gradually absorbed as monetary policy takes effect and expectations remain anchored. By contrast, when shocks begin to have more lasting effects on price and wage formation, inflation becomes more dependent on its recent trajectory, making convergence toward the target slower and increasing the cost of disinflation. The central question of this study is whether this second situation has come to characterize the Brazilian economy.

This report has been prepared by UBS Brasil Administradora de Valores Mobiliarios Ltda, UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures at the end of the document.

One possible interpretation of this change concerns the evolution of inflation expectations. In a previous study, we developed an expectations de-anchoring index to measure not only the expected level of inflation, but also the extent to which projections deviate from the target across different time horizons. The indicator shows that de-anchoring is no longer limited to the short term and has also extended to medium- and long-term expectations, suggesting a gradual deterioration in the ability of the inflation-targeting regime to coordinate economic agents’ expectations. When confidence in convergence toward the target declines, price adjustments resulting from temporary shocks tend to be incorporated more strongly into price- and wage-setting decisions, prolonging their effects on underlying inflation. This does not, by itself, establish a causal relationship with greater inflation persistence, but it helps explain why shocks that were originally temporary may begin to influence inflation for a longer period.

Source: BCB, UBS. Normalized measure, between 0 and 1, which captures the degree of deviation of inflation expectations from the target. Values close to zero indicate anchored expectations; values close to 1…