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• Unlike some of its Latin American peers, Brazil has never managed to actually get inflation fluctuating symmetrically around the target. Typically the distribution of observed inflation deviation from the target has been tilted to the right, indicating that, more often than not, inflation reached higher than the target;

• This feature has been amplified in the post-2010 period. While other Latin American countries have recorded some worsening of their inflation records, this deterioration has been stronger in Brazil;

• The sheer fact that we are comparing Brazil to other Latin American countries, most likely subject to the same international shocks, is already an indication that the country has been reacting differently from its peers to the shock;

• Indeed, whereas in the previous period international commodity prices seemed to have scant effect on Latin American inflation, in the last two years Brazil has displayed a very different performance, while other Latin American countries continued to exhibit the same features as before ;

• We assign this different performance to the change in the exchange rate regime currently taking place in Brazil. While other Latin American countries kept their floating rate regimes in place, Brazil has been fiddling with the exchange rate, pegging its currency to the US dollar;

• As a result, and in sharp contrast to other Latin American countries, the shock of higher international commodity prices has been fully translated into domestic prices, helping push up inflation, mainly through the food inflation channel;

• As a matter of fact, since the beginning of the year we observe an appreciation of other Latin American currencies, as the US dollar has become between 3% and 8% cheaper than at the beginning of the year, while in Brazil it has become 10% more expensive during the same period;

• Had the real moved in tandem with those currencies, as it used to do, we reckon it would be trading today around R$ 1.69 to R$ 1.77 to the dollar. Under these circumstances commodity prices in reais would be 13% to 17% cheaper than they are, suggesting a very different inflation path.

• This process highlights the difficulties in keeping inflation at the target while simultaneously trying to fix the exchange rate as well. For this reason we continue to be skeptical of (linear, non-linear, hyperbolical, elliptical, or whatever) convergence of inflation towards the target until BCB moves back (if it one day would do) to its previous inflation targeting stance

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