Portuguese Inflation Takes Hold

Inflation in Portugal is now rising sharply. Year-over-year inflation is still tepid, below 1% in both the HICP and National inflation definitions. But over three months, inflation is at a 4.5% annual rate on the HICP definition and 5.3% on the National definition. The National core inflation rate is also up by 0.9% year-over-year, but it is at a much more subdued 2.4% annual rate pace over three months. HICP core readings are not yet available.

In May on the National inflation detail, prices fell in just two categories. In April they had fallen in six categories and in March they had fallen in two categories. Price weakness appears to be giving way to strength.

In May month-to-month inflation is up in 10 of 12 National categories. In April inflation had risen in only 5 of 12 categories. Over broader periods, inflation has accelerated; in three months compared to six months inflation is up in 9 of 12 categories as of May while over six months the acceleration is only in half the categories - six of 12. Over the past year, inflation is up compared to its annual rate of one year ago in 10 of 12 categories.

While the upturn in inflation is abrupt, it is also over rather brief period. As energy prices stop falling and turn to increases, they can have a pronounced impact on inflation. We see that in the differences in the trajectories between the headline and core rates of change.

Still Portugal is showing a good deal of inflation pressure and prices are rising on a broad front. While this is not the same sort of pressure that is being experienced, EMU-wide authorities will want to watch to see if inflation is taking hold faster in the peripheral countries than in the core countries as it always has in the past. Keeping EMU's progress on austerity is not just about reining in excess fiscal spending, but it is about keeping inflation at more or less the consistent pace in the various EMU members.

Right now Portugal is looking like it could be becoming an inflation problem. And this is with all eyes misdirected and focused on Greece. All hopes in the EMU are for some sort of facing saving deal for all that will not test the unity of the euro area. But while Greece is in the headlines, the EMU cannot afford to take its eye off the conditions prevailing in other member nations that also have been struggling. Running a currency union is always about multitasking.