Inflation moves back inside the tolerance range, but convergence is not yet complete
Recent dynamics
Brazil entered 2025 with 12-month IPCA inflation at 4.56%. Price pressures intensified during the first half of the year, with inflation reaching 5.53% in April and remaining above 5% through September. The final quarter brought a clearer improvement: inflation declined to 4.68% in October, 4.46% in November, and 4.26% in December.
The path remained uneven in 2026. Annual inflation rose to 4.44% in January, fell sharply to 3.81% in February, and then accelerated again to 4.72% in May. Since that local high, however, the direction has turned favorable. Inflation eased to 4.64% in June, 4.44% in July, and 4.22% in August.
The latest reading represents a 0.91 percentage-point decline from August 2025, when 12-month inflation stood at 5.13%. On a monthly basis, the IPCA fell 0.32% in August 2026, after increasing 0.07% in July. Lower housing, transport, and food prices contributed to the decline, with residential electricity providing an important temporary disinflationary impulse.
Interpretation and economic signal
At 4.22%, annual IPCA inflation is now below the 4.5% upper limit of Brazil's continuous inflation-target tolerance range. This is an important improvement from the readings above 5% observed during much of 2025. Nevertheless, inflation remains 1.22 percentage points above the 3% central target, so the latest data are better characterized as renewed disinflation than as completed convergence.
The composition of the recent decline also calls for some caution. The Central Bank has noted that part of the fall in 12-month inflation through August reflects a temporary reduction in residential electricity prices. As this effect fades, headline inflation may not continue declining at the same pace, particularly if food prices strengthen or services inflation remains persistent.
Monetary policy therefore remains restrictive despite the improvement in headline inflation. In September, the Copom reduced the Selic rate to 13.75% while stressing that inflation is still above target, expectations remain elevated, and risks around the outlook continue to be skewed to the upside. The current policy stance is aimed at preserving the disinflation process while gradually allowing the effects of past monetary tightening to pass through the economy.
The broader outlook reinforces this distinction between improvement and full normalization. Market inflation expectations for 2026 and 2027 remain above the target, while the Central Bank's reference scenario still places inflation above 3% over the near-term policy horizon. This means that additional progress will depend increasingly on more persistent components of inflation rather than on temporary relief from volatile or administered prices.
Conclusion
Brazil's inflation picture has improved materially over the past year. The decline from 5.13% in August 2025 to 4.22% in August 2026, together with the return below the upper tolerance limit, indicates that the disinflation process has regained momentum after the renewed pressure seen earlier in 2026.
The signal is positive, but not yet definitive. Inflation remains above the 3% target, part of the latest decline is temporary, and inflation expectations are still elevated. A more durable convergence will require continued moderation in underlying and services inflation, contained food and energy pressures, and enough monetary restraint to keep domestic demand and expectations consistent with the inflation target.