The Mencken theorem

BRAZIL ECONOMICS - Report 09 Jun 2026 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

The persistence of high interest rates has led to proposals to raise Brazil’s inflation target, currently set at 3%. It is argued that, due to inflation inertia, still a legacy of the hyperinflationary period, the Central Bank faces difficulties in reducing the Selic rate. This idea is mistaken. Even in a context of inertia, expected inflation over the relevant horizon is a weighted average between past inflation and the target itself. Raising the target therefore increases expected inflation, which contaminates current inflation. The result is higher inflation, forcing the Central Bank to raise interest rates even further, even under the assumption of perfect credibility. When credibility is not perfect and inflation expectations are already above target, raising the target makes the problem even worse, as it introduces the risk of further changes ahead, accelerating inflation.

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