Monetary Policy and Inflation Expectations in Brazil: From 2005 to 2022

The Focus Report prepared by the Central Bank of Brazil summarizes the statistics calculated from market expectations, such as inflation expectations for the next four years that are weekly collected. The report shows the evolution of these data using graphs and weekly projections for price indices, economic activity, and exchange rates. However, the expectations of households and firms regarding the future of inflation, which are determinants for current inflation, go beyond problems of theoretical and empirical foundation. Thus, the research question addressed in this study is as follows: Do expectations of inflation measured by the Focus Market Report explain inflation measured by the CPI in Brazil? To answer this question, we compare expected and actual inflation data and analyze the correlations between them. This research is important because part of the argument for increasing the basic interest rate in the Brazilian economy is based on data from the Focus Report, which may contain forecasting errors, thereby resulting in monetary policy mistakes. The research methodology consists of contrasting data on monthly expectations with actual inflation rates and assessing the correlations between them.