Current political polarization and pessimism may be linked to the discontent of a significant portion of the population that sees itself as a loser in a game arbitrated by institutions more concerned with self-preservation than with defending fair and impartial rules. The hand of the state comes to be seen as determining the allocation of wealth in favor of specific groups — sometimes perceived as undeserving — without imposing a relevant burden on the most privileged segments of society. Hence the strength of themes such as meritocracy, religion, and entrepreneurship. Polarization and pessimism in an electoral context favor populist approaches such as: the search for culprits, the presentation of simple solutions, attacks on institutions, and emotional appeals focused on fear.
Even though markets continue to price in interest rate cuts in 2026, the rise in oil prices associated with the bombings of Iran — even if temporary — tends to make the currently expected reduction in the policy rate much less likely. Evidence of persistent inflationary pressures was already emerging due to labor cost dynamics and the interruption of the oil price decline cycle that had been in place since 2023. Added to these factors now is the possibility of an increase in costs associated with fuels and other petroleum-derived products. Even if not very persistent, it would definitely challenge inflation convergence to the target.
Recent inflation indicators in the United States have shown diverging trends. The market becomes enthusiastic with the CPI, which is decelerating, but loses confidence when the PCE deflator is released, as it has been trending upward (see Charts 1 and 2). Given that the latter assigns greater weight to the services sector - which is more resilient - and within it, a smaller weight to rent, which has helped pull the CPI downward, we believe the increased caution expressed by members of the Federal Reserve’s Monetary Policy Committee is justified.
The focus of parliamentary activities in 2026 will be directed toward the elections. On one hand, the government will seek to approve the end of the 6x1 work schedule, while the opposition will attempt to generate political noise through the INSS CPI and push for an investigation into the Banco Master scandal. Congress will also be called to ratify the agreement between Europe and Mercosur. It is also important to monitor actions at the Supreme Federal Court, especially the advancement of a code of ethics, which is the minimum necessary to prevent further deterioration in confidence in institutions.
Is it possible to identify signs that monetary policymakers are yielding to political pressure and that confidence in maintaining price stability is at risk?
In our view, there are indeed some indications of susceptibility, but with virtually no impact on institutional credibility.
