Portugal: Inflation expected to hit 7.7% this year, fall to 5.1% in 2023

The Public Finance Council (CFP) sharply revised upwards the inflation rate for this year to 7.7%, expecting a gradual reduction to 5.1% in 2023 and 1.9% in the medium term, it said on Thursday.

In the update report of the 2022-2026 economic and fiscal outlook, published today, the institution “projects intensification of inflationary pressures in 2022, with an acceleration in the inflation rate, measured by the HICP [Harmonised Index of Consumer Prices (HICP)], to 7.7%.

The update represents an upward revision from the 3.9% forecast in March.

This rate is above the benchmark of 7.4% that the government is working with, according to the Prime Minister, in an interview on TVI on 12 September, and an upward revision compared to the 4% forecast in the State Budget for 2022.

The CFP explains that “inflation in 2022 should mainly reflect the expected dynamics of food and energy prices in international markets, the depreciation of the euro and the maintenance of supply-side constraints.

However, the institution chaired by Nazaré da Costa Cabral foresees a gradual easing of the inflation rate starting next year, “in line with the gradual fading of inflationary pressures and progressive normalisation of supply.

It thus anticipates a rate of 5.1% for 2023, still above the 2.2% forecast in March, and calculates that the rate will be 2.2% in 2024 and 1.9% in 2025 and 2026.

However, the institution warns that the macroeconomic scenario it outlines – and based on invariant policies – is marked by “high uncertainty,” with “risks being predominantly of external nature, and tilted downwards for economic activity growth and upwards for inflation.

Among the risks, it points to the worsening of the conflict in Ukraine, which “could lead to an eventual interruption in the supply of energy goods from Russia to Europe,” as well as the possible worsening of inflationary pressures, which could lead to “maintenance or strengthening of Covid-zero measures in China, which prolong the constraints in global production and distribution chains” and “inflation (including energy and food goods) to pass through to underlying inflation.”

“In the latter case, the increase in inflation expectations over the medium term could result in a faster normalisation of monetary policy and consequent worsening of the economy’s financing conditions – with more significant consequences for Portugal due to the high indebtedness of families and companies,” it warns.