Impact of US tariff hike on inflation will depend on Brazilian government's reaction, economists say

BRASILIA - The tariff hike announced by the U.S. government on Brazilian products continues to generate debate among economists about its impact on inflation . On the one hand, a stronger U.S. currency would make Brazilian imports more expensive. But on the other, redirecting items that would otherwise be exported to the U.S. to the domestic market would push inflation down.

The only certainty, say experts consulted by Estadão , is that if the Brazilian government decides to retaliate with tariffs of 50%, the situation will change, with an escalation of the trade war and a direct effect on prices.

For now, the foreign exchange market's reaction has been relatively restrained, says economist Luis Otávio Leal of G5 Partners, because investors believe the Brazilian government will give a calculated response, based on diplomacy, and without escalating the dispute with US President Donald Trump.

"The dollar's reaction so far has been largely based on the idea that the Brazilian government's reaction was more restrained, and there was no immediate retaliation. Therefore, it is clear that what will weigh on the exchange rate will be precisely this reaction from the Brazilian government," Leal stated.

The dollar jumped from R$5.44 to R$5.50 on Wednesday, the day the tariffs were announced (1.04%), rising to R$5.54 on Thursday. On Friday, however, it remained stable. Over the three days, the accumulated increase was 1.08%.

"For now, the effects of the tariff hike on inflation are canceling each other out. The dollar's rise at this point is nothing; it's back to the same level it was two weeks ago. If this is diluted in inflation over 12 months, it's a very small effect, which could be offset by an increase in meat supply, for example," said Marcelo Fonseca , chief economist at Reag Investimentos.

Still, Trump's tariff hikes have caught Brazil in an adverse inflation scenario, increasing uncertainty. Annual (12-month) inflation rose from 5.35% through June. This was the sixth consecutive month of inflation above the 4.5% target ceiling, and well above the 3% target set by the National Monetary Council (CMN). This forced the Central Bank to issue a letter explaining the reasons for the failure to meet the target .

Expectations are also "unanchored," with projections above the 3% target by 2028, according to the Focus Bulletin. At a public hearing in the Chamber of Deputies this week, Central Bank President Gabriel Galípolo summarized the challenging inflation outlook, which has "IPCA outside the target in the core (which excludes more volatile items), in current inflation, in expectations, and in the food core."

Economist Luiz Roberto Cunha , from PUC-Rio, has a more pessimistic view, believing there will be an impact on prices, even if indirect. He notes that Trump has already warned he will raise tariffs again in the event of retaliation and asserts that the U.S. government's decision is political, not economic, since the U.S. has a trade surplus with Brazil.

"The risk is that the dispute will escalate if the Brazilian government retaliates, in a scenario similar to what happened with China. But even if the tariffs remain at a 50% increase, it will have an effect on inflation, even if indirectly," he said.

Andrea Ângelo of Warren Investimentos believes that for the tariff hike to have a stronger impact on inflation, the dollar will have to return to trading above R$6 and remain at that level for a long time. Therefore, the market will closely monitor the Brazilian government's every move.

"I understand that the IPCA has a deflationary bias, as long as the dollar doesn't exceed the R$6 mark too much. Items like coffee, orange juice, and beef, which are important in our exports to the US, may end up becoming more available here. But we need to see how negotiations progress and what Brazil's response will be," said Ângelo.

According to the June IPCA, ground coffee prices had accumulated a 77.88% increase in the last 12 months. Meats (beef, pork, and lamb) rose 23.63% in the same comparison, with a 15% increase in filet mignon, 24.15% in rump, and 25.5% in flank. Meanwhile, pear oranges, most commonly used in juices, saw a 6.26% increase.

Sérgio Vale of MB Associados also believes that the Brazilian government's response will be decisive. In a more extreme scenario, if the government follows the worst path of also taxing Americans at 50%, the Central Bank will be forced to raise the benchmark interest rate again, which is already at a high level of 15%.

"If Brazil retaliates fully, it could be a problem; it could hit inflation and also extend the Central Bank's interest rate hike for longer. It will be essential to know how Brazil will behave. The best course of action would be to consider a more intelligent response, such as breaking patents, and being very selective in what to retaliate against," said Vale.

Until August 1st, when the US tariffs take effect, it will be important to monitor the pressure from the sectors most affected by the tariffs, economists point out. In both the US and Brazil, industry lobbies (steel, aluminum, agriculture, among others) will try to calm the dispute, and this could lead to Trump's retreat in the US and Lula's response in Brazil.