Brazil experienced the lowest inflation rate for the month of January since the implementation of the Real Plan back in 1994, with the official inflation measure, known as the Índice Nacional de Preços ao Consumidor Amplo (IPCA), reported at just 0.16%. This announcement, made by the Instituto Brasileiro de Geografia e Estatística (IBGE) on February 11, 2025, revealed a significant decrease from the December figure of 0.52%, indicating the potential for some easing in the economy.
The key driver behind this notable deceleration was the sharp drop of 14.21% in residential electricity prices, largely due to the implementation of the so-called Bônus Itaipu, which provided discounts on electricity bills to millions of Brazilian households. Fernando Gonçalves, manager of the IPCA at IBGE, explained, “This decrease was the result of the incorporation of the Bônus de Itaipu, credited to invoices issued in January.” The impact of lower electricity costs significantly ameliorated the inflation figures, contributing negatively at -0.55 percentage points to the monthly IPCA.
Despite this encouraging news, experts caution against viewing the situation too optimistically. Eduardo Santarossa from Fami Capital noted, “Although this number may seem low on its own, the composition and trend are concerning.” Analysts pointed out the inflation’s underlying segments and concerns about potential upward pressures as the economy stabilizes. Resilient economic activity appears to be stoking inflationary pressures, particularly within the service sector, which remains alarmingly high.
Transportation and food prices, on the other hand, continued to exert upward pressure on inflation. The transportation category alone surged by 1.3% during January, driven primarily by significant increases in the prices of airfares, which rose by 10.42%, and urban bus fares, which climbed by 3.84%. The food and beverage sector also saw its fifth consecutive month of price increases, recording a rise of 0.96%. Within this group, particularly notable were increases for domestically consumed foods, including carrots up by 36.14%, tomatoes by 20.27%, and ground coffee by 8.56%. Such trends have raised eyebrows, with concerns about the sustainability of these price hikes moving forward.
The regional impact of inflation presented varying experiences across Brazil, with Aracaju experiencing the largest price increase at 0.59%, influenced primarily by hikes in airfare. Conversely, Rio Branco saw the most significant decline at -0.34% owing to the reduced costs of electricity. Notably, five regions reported negative variances, including Porto Alegre and Goiânia, demonstrating the uneven nature of price effects across the country.
For the broader economic outlook, there is considerable uncertainty. The 12-month accumulated inflation now stands at 4.56%, still above the government’s target ceiling of 4.5% set by the Central Bank. Claudia Moreno from C6 Bank emphasized the continuing inflationary concerns, stating, “The inflation remains worrying, with undercurrents trending upwards.” Without the one-time effect of reduced electricity prices, analysts predict the inflation rate would have been significantly higher, estimated between 0.71% and 0.80%. That prompted economists to anticipate additional pressure on the Central Bank’s monetary policy.
Looking toward the rest of the year, economic forecasts maintain the expectation for interest rates to increase, with market projections seeing the Selic rate rising from the current 13.25% to as high as 15% by year-end. With core inflation measures showing elevated levels of price growth, there is consensus among economists, including Tatiana Pinheiro from Galapagos Capital, on the need for the Bank to remain vigilant and potentially tighten monetary policy to combat the persistent inflation rate.
While the January IPCA results may provide some temporary reprieve from rising prices, the broader economic indicators suggest continued vigilance is required. The combined forces of currency depreciation, service costs rising, and the potential for delayed inflationary pressure through the coming months remain key factors shaping Brazil’s economic narrative as it navigates these challenging economic waters.