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.
The producer price index (PPI) came in above expectations in January, adding to the latest personal consumption expenditures (PCE) deflator reading to form a much less benign picture for inflation in the United States. Recent attacks on Iran suggest that the disinflation driven by falling oil prices is likely to be interrupted, at least for a few months, which will certainly affect inflation forecasts and FOMC monetary policy decisions.
Despite the exchange rate appreciation, which reduced the stock of non-financial sector debt denominated in reais, both indebtedness and delinquency levels remained at concerning levels in January 2026. The situation is likely to worsen (with the economic slowdown) before improving (with lower interest rates).
