What does rising inflation in the US mean for interest rates in Brazil?

Inflation in the United States rose 4.2% year-on-year in May, the highest level in three years, accelerating from 3.8% the previous month.

The announcement on Wednesday, June 10, by the U.S. Bureau of Labor Statistics, reflects the impact of the conflict in the Middle East – core inflation, which excludes volatile items such as food and energy, showed more moderate gains, rising only 0.2% in May or 2.9% compared to the same period last year.

Following the release of the figures, oil prices rose again on the international market. In the afternoon, the price of Brent crude, the international benchmark, rose 2.72%, closing at US$93.46.

US stock markets also reacted to the inflation figures. By mid-afternoon, the Dow Jones Index (1.43%), the Nasdaq Composite (1.57%) and the S&P 500 (1.18%) were trading lower.

The acceleration of US inflation reinforced the trend of maintaining high interest rates in the United States, increasing pressure on emerging markets, including Brazil – which explains the 0.78% drop in the Ibovespa at 4 pm, while the dollar traded with volatility, reaching R$ 5.22 in the morning, later falling to R$ 5.18.

The data is expected to have an impact on next week's Super Wednesday, when both the Fed and the Brazilian Central Bank meet to decide on the future of their respective countries' benchmark interest rates. This will be the first meeting of the US central bank with its new chairman, Kevin Warsh.

Fuel prices have been the main driver of American inflation, with the cost of gasoline rising by about 50% in the country since the start of the war in March. In February, before the conflict, inflation was 2.4% - close to the Fed's 2% target.

“I love inflation,” stated US President Donald Trump this Wednesday, June 10th, in the Oval Office of the White House, after being questioned about his concerns regarding recently released consumer price index data. According to him, the economic consequences of the war were “worth it” to prevent Iran from obtaining a nuclear weapon. “Inflation will plummet when the war is over,” Trump said.

However, Americans have become increasingly frustrated with Trump over the economic impact of the conflict. A poll released this week revealed that 68% of voters disapproved of his handling of inflation and the cost of living, a 10 percentage point increase from April.

The recent rise in inflation in the US keeps the pressure on the Federal Reserve to keep interest rates stable in the near future, while officials assess the risk that inflationary pressures stemming from the war in Iran will spread to other sectors.

“The longer the conflict in the Middle East persists, the broader and more persistent the inflationary pressures will be,” warned Gregory Daco of the global consulting firm EY Parthenon.

Given this scenario, Fed officials have become more cautious about interest rate cuts. Many central bank members have mentioned the possibility that rates may need to rise at some point for inflation to return to the 2% target set by the central bank.

Impact in Brazil

Rising US inflation is very bad news for Brazil. This is because it increases the likelihood of high interest rates in the US for longer, which reduces risk appetite and tends to cause a drop in the Brazilian stock market, as investors migrate to more attractive Treasuries.

As an indirect effect, this scenario tends to put pressure on the exchange rate and make it more difficult to lower the Selic rate. With higher US interest rates, there is an outflow of capital from emerging markets.

Analysts point out that the rise in the dollar exchange rate, reaching R$ 5.22 before starting to fall, confirms this movement, since the currency was trading between R$ 5.04 and R$ 5.05 just over a week ago.

Gustavo Assis, CEO of Asset, admits that high interest rates in the United States reduce the Copom's (Brazilian Central Bank's Monetary Policy Committee) room to cut the Selic (Brazil's benchmark interest rate) because they put pressure on the exchange rate, keep the global cost of capital high, and make Brazil more dependent on an attractive interest rate differential.

“At the next meeting, the Copom [Monetary Policy Committee] should maintain the Selic rate, but communication will be as important as the decision itself,” says Assis. “If the Central Bank signals that cuts depend on anchored inflation and an improved external environment, the market will begin to price in a gradual transition, without breaking the cautious trend.”

Even before the announcement of US inflation figures, the financial market had already abandoned the prospect of an interest rate cut at the next Copom meeting – previously, the expectation was for another 0.25 percentage point cut. The prevailing expectation is that the benchmark interest rate will remain at the current 14.50%.

BTG Pactual revised its Selic rate projection from 13% to 14.25% this year, Itaú changed it from 13.25% to 13.75%, and XP from 13.75% to 14%. On Monday, the 8th, the Focus survey also showed an increase in the estimate from 13.25% to 13.50% by the end of 2026.