Lula penalizes low-income population, his electoral base, with high inflation and interest rates

Inflation over 12 months reached 5.53% in April, the highest rate in two years, according to the IBGE. The price increase mainly affects low-income families, Lula's electoral base, and forces the Central Bank (BC) to maintain a restrictive monetary policy, with higher interest rates.

Faced with persistent inflation, the Monetary Policy Committee (Copom) raised interest rates again in the second week of May. The Selic rate rose to 14.75% per year, the highest level in 19 years. Although technically necessary to contain inflation, the measure has severe consequences for the poorest population.

With higher interest rates, the cost of credit increases substantially, making financing, loans and installment purchases more expensive – resources often used by the most vulnerable families to purchase essential goods. Since August, when the current cycle of increases in the Selic rate began, until March, the average interest rate on credit operations for individuals rose from 2.35% to 2.56% per month, the highest since July 2023.

The result is a perverse cycle: the rise in interest rates, necessary to contain inflation, ends up worsening the financial situation of the poorest even further. According to an April report by the National Confederation of Commerce (CNC), 77.6% of Brazilian families are in debt, the highest percentage since last August. According to the same survey, 29.1% have outstanding debts and 12.4% say they are unable to pay what they owe.

High interest rates are likely to persist for a long time. The minutes released by Copom on May 13 indicate that they will be necessary to ensure inflation converges to the 3% target.

The midpoint of financial market expectations for the IPCA in 2025 was 5.51% in the latest Focus bulletin, released on Monday (12), about one point above the target ceiling. The median for 2026 was 4.5%, right at the top.

Lula's government stimulates demand, puts pressure on inflation and favors high interest rates

The Central Bank and Lula are moving in opposite directions. The former is trying to contain inflation through high interest rates. The government, in turn, has been announcing measures that work in the opposite direction, stimulating demand and putting even more pressure on prices.

The release of the extraordinary withdrawal of FGTS, the change in the rules for credit assigned to the payroll of private sector workers and the expansion of the Minha Casa, Minha Vida program for those who earn up to R$12,000 inject resources into the economy at a time when economic activity is already showing considerable dynamism.

The GDP Monitor of the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV Ibre) indicates annualized growth of 3.1% through February, while the Economic Activity Index of the Central Bank (IBC-Br) reveals an even greater expansion of 3.8% in the 12 months ending in February. This economic growth, combined with government stimulus, is fueling the inflationary cycle.

Additionally, the increase in fiscal risk and uncertainties about the sustainability of public finances contribute to the unanchoring of inflation expectations. Economic analysts point out that the weak implementation of the new fiscal framework compromises the effectiveness of monetary policy, requiring even higher interest rates to offset the perception of risk.

Persistent inflation has unequal impacts on the population

The rise in consumer prices is not felt equally by all social classes. A study by the Institute of Applied Economic Research (Ipea), an arm of the Ministry of Planning, shows that inflation for very low-income families – with a monthly household income of less than R$2,200 – was 2.59% in the first four months of the year. For high-income families, with earnings of more than R$22,000, it was 2.21%. The overall IPCA was 2.48%.

The difference occurs because the items that have seen the biggest price increases are precisely those that have the greatest weight in the budget of the poorest families. In the last 12 months, the biggest increases occurred in basic foods (the price of coffee rose 80.2% in one year, soybean oil rose 22.8% and meat, 22.3%), ride-hailing (+19.6%) and health and personal care items (an increase of over 7%).

For low-income families, these increases compromise an even larger portion of their already limited budget, significantly reducing their purchasing power.

Services are among the biggest villains of inflation and fuel high interest rates

Unlike previous inflationary cycles, when food was the main culprit, the current driver of inflation is the services sector, which has risen 7.7% in the last 12 months. The phenomenon is directly linked to the booming job market, which recorded an unemployment rate of 7% in March – the lowest level for the month since the beginning of the historical series in 2012.

This good moment ends up fueling the problem. According to the IBGE, the provision of services had an annualized growth of 7.7% in March, the highest since November 2023.

Two segments recorded strong performance and accelerated growth: transportation, auxiliary transportation and postal services (5.2%) and information and communication services (9%). The expansion of this segment was the largest since July 2022.

The sales volume of expanded retail trade, which includes cars, motorcycles, auto parts and construction materials, registered annualized growth of 3% in March, after five months of decline or stability. The highlight was the construction materials segment, which jumped from a 12-month high of 0.4% in April 2024 to 6.8% in March 2025.