Inflation, Concept, calculation and consequences
Inflation 2022 in Portugal is at historic highs and continues to rise. The housing market is especially affected by the current 2022 inflation scenario.
Forecasts predict an increase of more than 6% later this year, due to the pandemic and the war in Ukraine.
In this sense, many are wondering what exactly is inflation, what are the consequences of this price escalation, and what justifies this rise?
The prices of goods and services are constantly being updated. This is normal, in a market economy, where demand and supply are in constant dialogue.
The same is true for fuel, cars, technology items, loans, and many other essential goods. This in itself does not mean that there is inflation, nor is it cause for concern.
However, if the price of many goods or services rises over a long period, such as a year, the economy is inflated. This is what is happening now with inflation 2022.
In a situation like this, the value of money decreases, that is, with one euro you buy less than before, and the purchasing power of consumers reduces.
In Portugal and the rest of the Euro zone, inflation is at record highs. In March the country registered 5.3% inflation, the highest value since 1994. In Europe inflation is the highest ever, around 7.5%.
These numbers worry consumers and companies, and already have an impact on the day-to-day lives of thousands of Portuguese.
Inflation calculation 2022
To understand what inflation means, it is essential to understand how it is calculated.
Every month, Eurostat observers collect the prices of approximately 700 goods and services in Portugal. This survey covers everyday items such as food products, durable goods such as personal computers and washing machines, and services such as hairdressing, insurance, and rent.
For each product, several prices are evaluated in various stores and regions.
Subsequently, the average price of all these products is calculated according to their weight in the family budget. The prices of products on which more is spent, such as electricity, have more weight, i.e. a higher weight, than those of products on which less is spent, such as sugar or postage stamps.
Finally, the change in prices compared to the same period of the previous year, the homologous period, is established. In other words, the prices of March 2022 are compared with those of March 2021, from which a percentage is obtained. If the percentage is positive, a price increase, or inflation, has occurred. If it is negative, then there has been a price decrease, or deflation.
In the euro area, this comparison is called the “Harmonized Index of Consumer Prices”, often simply referred to as the “HICP”. The term “harmonized” comes from the fact that all countries in the European Union follow the same methodology, which ensures that data for one country can be compared with data for another.
What causes inflation 2022?
As a general rule, in a context of economic crisis, prices tend to decrease. Households consume less, causing a reduction in demand and a decrease in prices.
On the other hand, when the economy is booming, prices rise. In this situation, households tend to consume more, which increases the demand for various goods and services, and their price.
However, there are many other components determining the current inflation 2022. Inflation also occurs when prices increase due to increases in production costs, such as raw materials.
These additional costs are passed on to consumers in the form of higher prices. This is what happens due to the war in Ukraine and the escalating prices of grain, oil, fertilizers or natural gas.
Inflation can also be caused by strong consumer demand. This is what happened with the prices of essential products during the confinement. In addition to the upward pressure on demand, the pandemic also complicated the management of production chains, leading to both demand and supply-side inflation.
With the pandemic over and the war in Ukraine continuing, the forecasts for inflation 2022 are unequivocal: the rise is set to continue.
The European Central Bank (ECB) has revised upwards the Euro Zone’s inflation rate in 2022 from 3.2% to 5.1%. The Bank of Portugal has also adjusted its forecasts. Instead of rising 1.8%, prices are expected to rise 4% this year, which if confirmed will be the highest inflation rate since 2001.
Consequences of inflation
Inflation is essential since it means a loss of real purchasing power over time. If it is not accompanied by an increase in income, it is equivalent to a pay cut.
Think about the money you have in your bank account or savings. When prices rise, you can no longer buy as much with that amount. To all intents and purposes, that money has lost value.
If you are an employee or pensioner, you are among the most vulnerable groups to inflation 2022. While those running a business can pass on cost increases to customers (up to a limit), those on fixed incomes or with savings will find it harder to increase personal income proportionately.
With prices rising, you may even feel the need to cut back on purchases or resort to riskier investments to regain purchasing power. Borderline situations that make controlling inflation one of the European Central Bank’s top priorities.
Influence of inflation 2022 on mortgage creditThe current constraints in the production and logistics chains affect the prices of materials and construction – from wood and steel, to nails and rivets – and related services such as labor and transportation.
Costs that, as far as you are concerned, spill over to the consumer and push up the price of houses and home loans. With this increase, rents also go up, as prospective buyers find themselves unable to afford properties.
Those who bought a fixed-rate mortgage are better protected against 2022 inflation. With fixed-rate loans, the interest rate on the loan remains unchanged during the term that has been agreed upon with the lending institution.
During this period the monthly instalment always remains the same. This means that if market interest rates, for example the Euribor interest rate that is affected by inflation, continue to rise, the fixed rate does not change.
However, under normal market conditions, the instalment for a fixed interest rate loan is higher than the instalment indexed to Euribor. The customer pays a higher price for the security of not having his installment increased.