Inflation: causes, measurement and consequences

You notice inflation when the same grocery run costs more than it did the month before. For the Banco Central do Brasil (Brazil’s central bank), inflation is the increase in the prices of goods and services, and its direct consequence is a decline in the currency’s purchasing power (Banco Central, O que é inflação).

This article explains the causes, how inflation is measured in Brazil, how the inflation-targeting system works and what the consequences are. The figures cited have a source and a date. The editorial team does not make inflation forecasts.

What inflation is, in practical terms

Inflation is not a price increase in a single product. It is a broad increase: many prices rising at the same time, so that money buys less overall (Banco Central, Índices de preços).

A simple example: if prices rise 10% in a year, R$ 110 now buys what R$ 100 bought before. Anyone whose income was adjusted by less than 10% became poorer in real terms, even while receiving the same nominal amount (or a little more).

The opposite, a broad drop in prices, is called deflation. It sounds like good news, but the Central Bank points out that continuously falling prices can lead households and businesses to postpone purchases and investments, depressing activity (Banco Central, O que é inflação). A drop in a single month, like the one in August 2026, is not the same as persistent deflation.

Where inflation comes from

The Central Bank groups the causes into four types (Banco Central, O que é inflação). The IMF article Inflation: Prices on the Rise describes the same division, under other names (IMF, 2019).

• Demand pressures. Demand for goods and services grows faster than the capacity to produce them. Abundant credit, high public spending or low interest rates can cause this.
• Cost pressures. Something makes production more expensive: pricier oil, a drought that raises energy costs, a crop failure, a stronger dollar making imports more expensive.
• Inflation inertia. Past inflation is passed on to future inflation through contracts, rents, tariffs and wages adjusted by the previous index.
• Expectations. If businesses and workers expect high inflation, they already build that increase into prices and wages, and the expectation helps fulfill itself.

The IMF adds a long-term point: high and persistent inflation usually reflects loose monetary policy, with the money supply growing far beyond the economy (IMF, 2019).

A real case: missing the target in 2025

Causes rarely appear alone. When inflation stayed above the upper limit of the target for six consecutive months, the Central Bank published an open letter on July 10, 2025, explaining the deviation. According to the bank’s own model, the 2.35 percentage points above the 3% target broke down as follows: inertia from the previous 12 months (0.69 p.p.), inflation expectations (0.58 p.p.), economic activity above potential (0.47 p.p.), imported inflation, linked mainly to the exchange rate (0.46 p.p.), the electricity tariff flag (0.27 p.p.) and other factors (-0.12 p.p.) (Banco Central, open letter of July 2025).

Notice that all four families of causes are there: demand (overheated activity), costs (exchange rate and energy), inertia and expectations.

How inflation is measured in Brazil

Inflation is measured by price indices: an average of many prices, weighted by the share each item has in the household budget, summarized in a single number (Banco Central, Índices de preços).

The two best-known consumer indices are calculated by IBGE (Brazil’s national statistics institute), according to the methodological notes in the August 2026 release (IBGE, IPCA e INPC - agosto de 2026):

Index	Whom it represents	Most common use
IPCA (Índice Nacional de Preços ao Consumidor Amplo, Broad National Consumer Price Index)	Households earning 1 to 40 minimum wages, from any source	Official index for the inflation target
INPC (Índice Nacional de Preços ao Consumidor, National Consumer Price Index)	Households earning 1 to 5 minimum wages whose reference person is a wage earner	Benchmark for wage adjustments

Both cover the same 16 areas: ten metropolitan regions (Belém, Fortaleza, Recife, Salvador, Belo Horizonte, Vitória, Rio de Janeiro, São Paulo, Curitiba and Porto Alegre), the Federal District and the municipalities of Goiânia, Campo Grande, Rio Branco, São Luís and Aracaju. The weights of each item come from the 2017–2018 Household Budget Survey (POF) (IBGE).

There are other indices, such as FGV’s IGP-M, released on the last day of the month to adjust contracts for financial transactions. The Central Bank notes that each household has its own basket, so the inflation you feel may differ from the official index (Banco Central, Índices de preços).

The latest data

The latest IPCA available on October 8, 2026, is the one for August 2026, released by IBGE on September 11, 2026:

• -0.32% for the month;
• 3.11% for the year to date;
• 4.22% over 12 months.

The INPC for August 2026 was also -0.32% for the month and accumulated 3.98% over 12 months (IBGE; SIDRA, table 1737). The September IPCA is scheduled for release after the date of this article, and the figures above may already have been updated by the time you read it.

The inflation-targeting system

Brazil has used an inflation-targeting regime since 1999. The National Monetary Council (CMN) sets the target and the index; the Central Bank takes the measures to achieve it (Banco Central, Metas para a inflação).

Under CMN Resolution No. 5,141/2024, in force on October 8, 2026, the index is the IPCA and the target for 12-month accumulated inflation, from January 2025, is 3.00%, with a tolerance band of 1.50 percentage points above and below, that is, from 1.50% to 4.50% (CMN Resolution No. 5,141/2024).

What changed in 2025 was how compliance is checked (Banco Central, Metas para a inflação):

• until 2024, the target applied to the calendar year and was only checked in December;
• since January 2025, a continuous target applies: every month, 12-month accumulated inflation is compared with the band;
• the target is only considered missed if inflation stays outside the band for six consecutive months, so as not to penalize temporary shocks;
• when that happens, the Central Bank publishes a note in the Monetary Policy Report and an open letter to the Minister of Finance, with causes, measures and a deadline for returning to the band;
• any change to the target must be announced at least 36 months in advance.

IBGE’s series shows the rule at work. The 12-month IPCA stayed above 4.50% from January (4.56%) to June 2025 (5.35%), six months in a row, which led to the July 2025 letter. It returned to the band in November 2025 (4.46%). In May and June 2026, it exceeded the ceiling again (4.72% and 4.64%), but returned in July (4.44%), before completing six months (SIDRA, table 1737).

How the Central Bank acts: the Selic rate

The main instrument is the Selic, Brazil’s benchmark interest rate. It is set by the Monetary Policy Committee (Copom) every 45 days, and the Central Bank buys and sells government bonds daily to keep it close to the decided level (Banco Central, Copom). The Selic is the reference for other interest rates in the economy.

The logic, in short: higher interest rates make credit more expensive and make saving more attractive than spending. Demand slows and pressure on prices eases. The IMF describes the same mechanism and highlights another channel, expectations: the more credible the central bank, the more its signals influence prices and wages (IMF, 2019).

This effect is not immediate. In its definition of the continuous target, the Central Bank states that the convergence period depends on the nature and persistence of the shocks (Banco Central, Metas para a inflação). To understand the role of central banks in general, see what central banks are and how they work; for the broader context, how the modern financial system works.

Consequences: who wins, who loses

The Central Bank lists the main effects of high inflation (Banco Central, O que é inflação):

• uncertainty, which discourages investment and hurts growth;
• distorted relative prices: it becomes hard to tell whether something is expensive or cheap;
• a heavier burden on the poorest, who have less access to investments that protect against inflation;
• more expensive public debt, because interest rates need to compensate for inflation and the risk associated with it.

The IMF adds redistribution between groups (IMF, 2019):

• people living on fixed incomes, such as retirees with annual adjustments, lose when inflation exceeds the adjustment;
• those who owe at fixed interest rates tend to gain from unexpected inflation, and lenders tend to lose;
• at the extreme, hyperinflation (which the IMF associates with rates of 1,000% a year or more) can lead a country to abandon its own currency.

In your budget

Three practical effects deserve attention:

1. Wages and income. Compare your raise with inflation over the same period. A real gain only exists above it.
2. Idle money. With a 12-month IPCA of 4.22% (August 2026), R$ 100 kept without any return over that period buys the equivalent of about R$ 95.95 at end-of-period prices (100 ÷ 1.0422, the editorial team’s calculation).
3. Real return. What matters in an investment is how much it earns above inflation, after fees and taxes. The article on compound interest shows how to do this calculation.

To adjust an old amount for inflation, the Central Bank’s Calculadora do cidadão (Citizen’s Calculator, in Portuguese) makes the correction using official indices such as the IPCA and the INPC.

Key takeaways

• Inflation is a broad increase in prices and means a loss of purchasing power. Its causes usually combine: demand, costs, inertia and expectations.
• In Brazil, the official index is IBGE’s IPCA. The current target is 3.00% over 12 months, with a tolerance band of 1.50% to 4.50%, checked every month; the target is only missed after six consecutive months outside the band.
• The Central Bank acts mainly through the Selic, with a lagged effect.
• For you, the practical question is always the same: are your income and your savings growing faster or slower than prices?