For Whom the Bell Tolls?

BRAZIL ECONOMICS - Report 14 May 2026 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

Copom rightly expresses discomfort with the rise in long-term inflation expectations in response to the oil shock, whose effects should dissipate before affecting inflation at more distant horizons. We argue in this report that this pattern results from the Central Bank’s stance since 2021, marked by a strategy of slower inflation convergence toward the target. In this context, short-term inflation shocks contaminate expectations for longer horizons. At the same time, as faster disinflation becomes more costly in an environment of unanchored expectations, the Central Bank cannot credibly promise timely convergence. Slow convergence and unanchored expectations thus characterize an equilibrium that is difficult to change.

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