For the ninth consecutive week, Brazil’s benchmark Focus survey has raised its inflation projection for 2026, now standing at 4.91 percent—comfortably above the upper tolerance limit of 4.5 percent set by the National Monetary Council. The latest reading, published on Monday by the central bank, reflects a steady deterioration in price expectations that has gathered pace since the onset of a sharp oil-price spike triggered by the conflict with Iran. Viewed from Brasília, the combination of robust domestic demand and President Lula da Silva’s new fiscal stimulus measures is overwhelming the effect of elevated borrowing costs, forcing economists to revise their forecasts upward not only for this year but also for the medium term.

Inflation is now expected to remain above the 3 percent target until 2029, according to the same weekly survey, which also pushed its Selic rate projection for end-2027 to 11.25 percent, up from 11 percent a week earlier. The central bank’s credibility is increasingly tested as actual price data reinforce the gloomy outlook: the IPCA-15 for April accelerated to 0.89 percent, driven by food and fuel costs, ahead of the full April figure due on Tuesday. Across the border, Argentina’s government has quietly acknowledged a similar reckoning.

In a presentation at a Moody’s event in Buenos Aires, Vice-Minister of Economy José Luis Daza revealed that the official inflation forecast for 2026 now stands at 29 percent—dramatically higher than the 10 percent assumed in the 2026 budget. That revision brings the executive branch closer to private-sector estimates recorded in the central bank’s market expectations survey. The adjustment reflects the lingering effects of administered price liberalisation and the unresolved weight of fuel subsidies: YPF’s price buffer remains in place, and analysts in Buenos Aires expect its gradual dismantling to add further upward pressure on consumer indices in the coming months.

For both economies, the energy price channel is proving more persistent than anticipated. The conflict in the Middle East has sent crude costs soaring, a development that simultaneously tightens external accounts and feeds domestic inflation. In Brazil, the central bank now faces a delicate balancing act: raising the Selic further could choke an already tepid recovery, but failing to respond forcefully risks unanchoring expectations altogether.

Market participants, according to the Focus survey, still project a stable Selic at 14.75 percent for the end of 2026, but the steady creep in inflation forecasts suggests that a rate hike later this year is increasingly probable. From a regional perspective, the convergence of fiscal expansion and external price shocks is undermining the credibility of inflation-targeting frameworks in Latin America’s two largest economies. London-based analysts note that while Brazil retains stronger institutional buffers than Argentina, the trajectory of its inflation expectations resembles the early stages of previous currency crises.

Much now depends on whether the central bank is willing to act pre-emptively—or whether it will wait until price pressures force its hand, as they have in Buenos Aires.