Portugal’s Inflation Picks Up and Cools Down

Portugal’s inflation data trends paint a mixed picture if looked at strictly. However, looked at more broadly, it is clear that the minor inflation backtracking is the exception while inflation falling and behaving is the rule.

Portugal’s HICP index in January rose by 0.5% month-to-month after being flat in December and falling 0.3% in November. Portugal’s national CPI also rose relatively sharply on the month, gaining 0.6% month-to-month in January after rising by 0.1% in December and being flat in November. The core rate in the national CPI rose by just 0.2% in January, the same as December, compared to a November performance that was flat month-to-month.

Inflation trends The overall HICP measure shows inflation decelerating despite the month’s jump. Twelve-month inflation is up 2.6%, over six months it rises by 1.9%, and over three months the inflation rate is at a 1.0% rate. The national CPI is more equivocal, rising by 2.3% over 12 months, accelerating to a 2.9% pace over six months, and settling at a 2.8% annual rate over three months. Despite that slight acceleration and stickiness for the headline, the core for the national CPI shows clear deceleration from a 2.4% gain over 12 months, to 1.7% at annual rate over six months, to a 1.4% annual rate over three months. On balance, inflation trends in Portugal seem to be in good shape and not only are the three-month and six-month inflation rates homing in on the ECB's target, but the 12-month inflation rates also are only a stone’s throw from the target set for the euro zone established by the European Central Bank.

Inflation acceleration/deceleration Inflation diffusion in January shows month-to-month inflation across categories accelerating in half of them, the same as in December. Despite the weaker November headline performance, inflation accelerated in 58% of the categories in November.

Looking at inflation acceleration trends sequentially on broader periods, we have a much more satisfying result. Over 12 months inflation accelerates in 25% of the categories, while over six months inflation accelerates in 41.7% of the categories. That's a step up in the proportion accelerating but still less than 50% of them. And over three months, inflation is back to accelerating in only 25% of the categories. All of this is descriptive of an inflation rate that is coming to heel and doing so consistently.

Price declines Looking at the 12 categories in the national CPI rate in January, six of them showed declines in prices month-to-month; that compares to only two that declined month-to-month in December and seven that showed month-to-month declines in November.

The broader sequential data show prices declining over three months in six of the categories; over six months, prices decline in four categories; over 12 months prices decline in only two categories.

It's not that surprising to see fewer price declines over 12 months than over three months because the shorter-term data are intrinsically more volatile. However, there's also a powerful sense of trend here in which inflation is behaving and part of that behavior has prices not just decelerating but declining. Over three months there has been a double-digit decline in prices measured at an annual rate for clothing & footwear. There is a decline of 2.7% at an annual rate for household furnishings and a decline of 2% at an annual rate for transportation as well as a 1.9% drop at an annual rate for recreation & culture. Inflation is falling at a 1.6% annual rate for alcoholic beverages & tobacco.

Twelve-month inflation rate ranking back to 1990 Looking at price developments broadly, the overall HICP inflation rate year-over-year at 2.6% ranks in its 73rd percentile on data since 1990. The national CPI is also at about its 73rd percentile, whereas the core, which is up 2.4% over 12 months, registers an 82nd percentile standing. Across the 12 components, three of them have percentile standings in their top 10%; those categories are: health, communications, and education. There are also below median increases since 1990; three are decisively weak: alcoholic beverages & tobacco, clothing & footwear, and the miscellaneous category. Household furnishings and transportation have rankings that are only slightly below their historic medians.

On balance, prices short-term and long-term, month-to-month, or sequentially within a year, or evaluated over a long horizon, are showing a great deal of discipline. The Portuguese inflation report for January is encouraging.