Inflation in Portugal: Recent Trends, Drivers, and Risks

InflationinPortugal,RecentTrends,Drivers,andRisks KamilDybczakandIppeiShibataSIP/2023/044 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonJune1,2023.ThispaperisalsopublishedseparatelyasIMFCountryReportNo23/219. 2023 JUL ©2023InternationalMonetaryFundSIP/2023/044 IMFSelectedIssuesPaper EuropeanDepartment InflationinPortugal,RecentTrends,Drivers,andRisksPreparedbyKamilDybczakandIppeiShibata AuthorizedfordistributionbyRupaDuttaguptaJuly2023 IMFSelectedIssuesPapersarepreparedbyIMFstaffasbackgrounddocumentationforperiodicconsultationswithmembercountries.ItisbasedontheinformationavailableatthetimeitwascompletedonJune1,2023.ThispaperisalsopublishedseparatelyasIMFCountryReportNo23/219. ABSTRACT:Thispaperexaminesrecenttrends,maindrivers,andriskstonear-terminflationinPortugal.Beforetheenergycrisis,inflationinPortugalwaslow,oftenbelowtheEuroAreaaverage,butitacceleratedquicklyinthesecondhalfof2022.OurestimatedPhillipscurveregressionsuggeststhat,similarlytootherEuroAreacountries,inflationinPortugalhasbeenlargelydrivenbyfoodandexternalpricespressures.Inflationisprojectedtograduallydecrease,reflectingrecedingenergypricesandanchoredinflationexpectations. However,uncertaintyremainshighandinflationcouldremainelevated,especiallyiftheinflationaryprocessbecamebackwardlookingorwage-inflationspiralsareinducedbypressuresfromenergyprices. RECOMMENDEDCITATION:Dybczak,KamilandShibata,Ippei(2023)“InflationinPortugal,RecentTrends,Drivers,andRisks”.IMFSelectedIssuesPaperNo.2023/044.Washington,D.C.,InternationalMonetaryFund JELClassificationNumbers: E31,E5,E7 Keywords: Inflation;oilprices;wages;second-roundeffects;pass-through Author’sE-MailAddress: kdybczak@imf.org/ishibata@imf.org SELECTEDISSUESPAPERS InflationinPortugal,RecentTrends,Drivers,andRisks June1,2023 PORTUGAL SELECTEDISSUES PreparedByKamilDybczakandIppeiShibata ApprovedBy RupaDuttagupta CONTENTS INFLATIONINPORTUGAL,RECENTTRENDS,DRIVERS,ANDRISKS2 A.StylizedFacts2 B.DriversofInflation-ThePhillipsCurve4 C.InflationProjections7 D.IsThereaRiskofaWage-InflationSpiral?9 E.Conclusions10References12 ANNEXES I.ComponentsofHICPInflationinPortugalandEA12 II.InflationDifferentialbetweenPortugalandEAacrossComponents14 III.HICPInflationWeightsinPortugalandEA16 INFLATIONINPORTUGAL,RECENTTRENDS,DRIVERS,ANDRISKS1 A.StylizedFacts 1.Beforetherecentenergycrisis,inflationinPortugalwasrelativelylow.Forthemostpartofthelastdecade,headlineandcoreinflationhoveredbelow2percent.Adisinflationtrendwaspresentinsomeofthecomponentsoftheharmonizedindexofconsumerprices(HICP,AnnexI).2 2.Whilebelowaverageeuroarea(EA)levels,inflationhasbeenstronglycorrelatedwiththerestoftheEA.Since2010,untiltheenergycrisis,Portugal’sheadlineandcoreinflationwerebelowtheEAlevelmorethanhalfthetime,mostlydrivenbynon-energyindustrialgoodssuchasclothingandfootwear.ThesetrendscontinuedduringtheCovidpandemic,partlyreflectinganalmost10percentdeclineintourism-relatedprices—e.g.,transport,andhotels,cafés,andrestaurants—andhigherweightoftheseitemsinPortugal’sHICPbasket,resultinginPortugal’sinflationfallingfurtherbelowtheEAlevel(AnnexII). 1PreparedbyKamilDybczakandIppeiShibata 2Wedefinecoreinflationasheadlineinflationexcludingenergyandunprocessedfoodprices. 2INTERNATIONALMONETARYFUND 3.However,theinflationdifferentialwiththeEAcannotbefullyexplainedbydifferencesinweightsofindividualHICPitems.ThestructureofPortugal’sHICPbasketissimilartothoseinotherEAcountriesandtheweightsarebroadlycomparableacrosscountries,despitesomedifferences(AnnexIII).Forexample,theweightoffoodandnon-alcoholicbeveragesinPortugal’sHICPbaskethasbeenabovetheEAlevelsince2012(atover20percent),whiletheweightofhousing,water,electricity,andgasrepresents10percentincaseofPortugal,itis16percentfortheEA.Despiteallthesedifferences,assumingtheaverageEAweightswereimputedtoPortugal,inflationinPortugalwouldbeonlyabout0.2ppaboveitsactuallevelin2021and2022.3 4.Inflationpickedupslowlyin2022H1,reflectingdelayedpassthroughfrominternationalcommoditypricestoheadline,butacceleratedquicklyin2022H2.Thepassthroughfromrisingenergyprices(betweenend2021toearly2022)toPortugal’spriceswaslesspronouncedthaninaverageEAcountry(about9percentincreasey/yinPortugalcomparedtoabout47percentforEAinMarch2022).Thismainlyreflectedpolicymeasures,suchasthereductioninnetworkaccesstariffsandotherpolicies(taxexemptionsonfuelexcisesandVAT,andtheIberianpricecapwereannouncedinmid-2022andcameintoeffectinH2).Eventually,headlineinflationacceleratedandafterpeakinginOctober2022(10.6percenty/y),ithasbeenonagradualdownwardpath.Incontrast,coreinflationexceededEAlevelinearly2022,andhashoveredaround8percentsinceSeptember2022,pointingtoastickierandmoreentrenchedinflationarypath. 5.Consumerpriceexpectationshavefollowedtrendssimilartothoseinheadlineinflation,4pickingupfromearly2021,and eventuallyexceedingEAaveragesbyend-2022.Theystarteddecliningduring2022H2,keepingrisksofsecondroundeffectsfromtheinitialcommodityp