The government is right to be concerned about the financial situation of Brazilian households, especially given the strong electoral appeal of the issue. The official strategy is to ease the financial burden on lower-income groups through subsidies (the “Unshackling” program). The remaining question is: who will unshackle government’s own debt? The answer: you.
The lion’s share of the labor market deterioration observed throughout 2025 was associated with job losses in the public sector. The monthly average of 3k jobs added in the recent past (+37k in 2024 alone) shifted to a contraction of 20k jobs on the same basis when considering the last 12 months (see Chart 2).
Although not yet incorporating the period following the oil shock, external accounts data indicate that Brazil is well positioned to weather the international crisis. First, the current account deficit, at 2.7% of GDP on a 12-month basis through February, has narrowed significantly from the 3.6% level prevailing in mid-2025 (Chart 1).
What happens when fiscal stimulus and directed credit expansion are excessive? The answer: the monetary authority is forced to maintain excessively high interest rates to contain inflation, which worsens the financial situation of both households and firms.
The monetary authority reduced interest rates last year in response to only a moderate increase in unemployment, but in an environment where the labor market remained tight. Labor supply may face additional constraints due to the aggressive immigration enforcement policy. The fact is that unit labor costs increased 2.4% over the 12 months through the last quarter of 2025, reflecting wages rising 5% and productivity growing 2.2% (Chart 1).
The Chair of the Federal Open Market Committee emphasized that there will be no room for rate cuts until clear evidence emerges that inflation is converging toward the 2% target. We have previously highlighted that, even prior to the recent increase in oil prices, such a dynamic was unlikely to materialize in 2026.
The inflation backdrop in the United States remains unfavorable. Core GDP deflator inflation had already shown an acceleration in January (from 3.0% to 3.1%). The latest PPI release now indicates that price pressures are not limited to wage-driven services but are also spreading to the goods segment, most likely reflecting the impact of tariffs (Chart 1).
It is premature to conclude that economic activity is weak or that unemployment is likely to rise. The loss of 92 thousand jobs in February in the nonfarm sector follows a gain of 126 thousand recorded in January. Additionally, part of the decline can be attributed to temporary factors, such as a strike in the healthcare sector. Finally, wage gains remain robust, demonstrating there is still strong bargaining power among workers.
