significant monetary stimulus is under way. - We estimate that recent BRL depreciation will have an impact on IPCA inflation of 0.5 p.p. this year and 0.38 p.p. next year. - We maintain our IPCA forecasts at 5.0% and 6.0% in 2012 and 2013, on the reduction of taxes on durable goods and on tax redemption expectations for 2013. - We are raising our forecast for 2012 and 2013 IGP-M to 7.0% and 6.5%, respectively. IntroductionThe pass-through coefficient is defined as the response of accumulated inflation to exchange rate nominal depreciation. Although other economic variables also influence the relationship between inflation and currency weakening, this note presents our estimate of the effects of the pass-through of the exchange rate to the consumer price index (IPCA) and to the industrial wholesale price index (IPA industrial) outcomes.In IPCAs pass-through exercise, we considered the following as economic variables that also influence the relationship between the consumer price index and currency weakening: (1) the price level: a high inflation backdrop tends to produce higher exchange rate pass-through; (2) output gap: the business cycle also matters in the pass-through to inflation, as above-trend growth tends to increase the pass-through coefficient; (3) real effective exchange rate: REER overvaluation or undervaluation can limit or amplify the pass-through effect; and (4) trade openness: the correlation between inflation and openness is negative; however, the more open the economy, the higher the degree of pass-through; in other words, the more open the economy, the greater the sensitivity of domestic inflation to inflation abroad.Our wholesale price index pass-through exercise focuses on the industrial wholesale price index (IPA industrial) instead of on the total wholesale price index (IPA) because the former is composed entirely of tradable goods, while the latter includes the agricultural price index, which includes some nontradable goods. Moreover, IPA agricultural is mainly driven by harvest and domestic weather problems, and these factors affect the final pass-through coefficient estimate. For our IPA industrials pass-through exercise, we included the following as economic variables that also influence the relationship between the industrial wholesale price index and currency weakening: (1) the price level; (2) output gap; (3) trade openness; and (4) commodity prices: raw material goods prices affect industrial goods prices.Historical correlationIn the last eight years, several periods of fast exchange rate depreciation exerted pressure on inflation. Nevertheless, the final impact of BRL depreciation on market prices inflation (IPCA) or IPA industrial was different in each period, as can be seen in the table below. For example, comparing the accumulated depreciation in 2004 with that in 2008, the importance of the business cycle and the initial inflation rate on the final FX pass-through to market prices inflation is clear. The BRL weakening between January and May 2004 (around 11%) had a higher impact on market prices inflation than the effect of BRL depreciation between August and October 2008, despite the FX rate having jumped much more in the latter period (around 60%). Regarding the FX pass-through to industrial wholesale prices, the GDP performance and commodity prices seem to be more important than the initial inflation