Gasoline, Groceries, and Gabriel Galípolo: Why Brazil’s Inflation Rebound Raises the Stakes for March

At a gas station in São Paulo, filling a tank now costs roughly 2% more than it did on New Year’s Eve — thanks to a fresh hike in the ICMS fuel tax that took effect in January.

That single line item, gasoline, contributed 0.10 percentage points to Brazil’s headline inflation for the month, a reminder that for Latin America’s largest economy, the path from taming prices to cutting interest rates is rarely a straight line.

Data published Tuesday by the IBGE showed consumer prices rose 4.44% in the twelve months through January, up from 4.26% in December.

The monthly reading came in at 0.33%, unchanged from December but more than double the 0.16% recorded in January 2025.

The annual figure landed one basis point above the median Bloomberg forecast of 4.43% — close enough to be unremarkable, yet high enough to keep policymakers cautious.

The number still sits below the central bank’s 4.5% tolerance ceiling, which is the politically critical threshold. When annual inflation last breached that ceiling in late 2024, governor Gabriel Galípolo was forced to write a public letter explaining the overshoot.

The fact that January’s reading stayed inside the band will provide some breathing room, but only some. Underneath the headline, the composition tells a more complicated story.

Fuel and food drive inflation pressures

Transportation was the biggest pressure point, rising 0.60% and contributing 0.12 percentage points to the index. Fuel prices surged 2.14% overall, led by gasoline at 2.06%, ethanol at 3.44%, and diesel at 0.52% — all driven by the January 1 increase in ICMS tax rates across states.

Urban bus fares also jumped 5.14% as cities including São Paulo, Rio de Janeiro, Fortaleza, and Salvador enacted annual tariff adjustments.

Some of that blow was softened: ride-hailing prices dropped 17.23% and airfares fell 8.90%, reversing December spikes. But the fuel pressure is structural rather than seasonal, meaning it will linger.

For the Lula government, the more politically sensitive pressure comes from food. The food and beverages category rose 0.23% in January, decelerating slightly from December’s 0.27% but still marking a second consecutive month of increases after a long period of cooling.

Household food costs edged up just 0.10%, helped by falling prices for long-life milk, eggs, and rice. Yet tomatoes surged 16.28%, potatoes climbed 12.74%, and meat rose 1.32% — the kinds of items that directly shape how Brazilian households perceive the economy.

That perception matters enormously as the country heads toward the October 2026 presidential election. Early last year, a spike in food inflation became the single most corrosive factor for Lula’s standing.

A Datafolha poll in February 2025 showed his approval at just 24% — the lowest across all three of his terms — while disapproval climbed to 41%. Food prices, not GDP figures, drove the collapse. A meme circulated that instead of the picanha steak Lula had promised voters, he had delivered “intermittent fasting.”

His numbers have since stabilized somewhat, with a June 2025 Datafolha reading showing 28% approval, but the scar tissue remains. Any sustained revival in grocery prices would reopen that wound heading into campaign season.

All of this frames the central question markets are now trading around: when the Copom meets in March, will it cut the Selic rate by 25 basis points or 50?

The Selic has been sitting at 15% since mid-2025, its highest level in nearly two decades, after an aggressive 450-basis-point tightening cycle designed to pull inflation back inside the target band.

The January Copom meeting held rates steady for a fifth consecutive time but, for the first time, explicitly signaled that easing could begin at the next meeting.

Then came Monday’s speech. At an event hosted by the banking association ABBC in São Paulo, Galípolo used language that tilted the balance toward a smaller cut.

He described the current phase as one requiring “calibration” and “parsimony,” acknowledged that the inflation outlook had improved, but cautioned that the economy has shown surprising resilience under tight monetary conditions and that labor market data continue to surprise policymakers. “This is not a victory lap,” he said. “That is why we are talking about an adjustment.”

“Galípolo used terms that suggest a bit more conservatism for the start of the cycle — like adjustment, calibration, and parsimony,” noted Milena Landgraf, a partner at Jubarte Capital.

“That was enough to strip some of the premium from the long end of the yield curve.” The market read was immediate: bets on a 25-basis-point cut in March strengthened at the expense of the 50-basis-point scenario.

The central bank’s dilemma is genuine. Inflation forecasts for 2026 have been falling for five straight weeks, with the Focus survey’s median IPCA projection dropping to 3.97% — well inside the tolerance band and approaching the 3% target.

The real has stabilized around R$5.50 per dollar for 17 consecutive weeks, removing one source of upward price pressure. And yet, long-term inflation expectations remain stubbornly anchored above target at 3.5% for 2028 and 2029, a persistent “unanchoring” that Galípolo has flagged as a concern.

GDP growth projections have been stuck at 1.80% for nine straight weeks, but the labor market refuses to cool as quickly as models predicted.

For international observers, the broader story is one of credibility under pressure. Galípolo inherited a central bank whose independence was formalized only in 2021, and he took office under persistent suspicion — from markets, opposition politicians, and even some within Lula’s own coalition — about whether a president’s former economic adviser could resist political pressure to cut rates prematurely.

The hawkish tightening cycle that preceded this moment was, in part, a credibility-building exercise. An aggressive opening cut could undermine that investment overnight.

The political pressures pull in the opposite direction. Parts of Lula’s coalition argue that keeping rates at a two-decade high is punishing the working poor and throttling growth before an election.

Business groups counter that the prolonged squeeze has stifled investment and employment. Both camps will be watching the March Copom meeting not just for the size of the cut, but for the signal it sends about what comes next.

In Brazil’s election year, the distance between 25 and 50 basis points is measured not only in monetary policy, but in political calculus.

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