Should we be concerned about inflation in Portugal?

Should we be concerned about inflation in Portugal?

Inflation has been climbing for months now, but we don’t need to read news reports to know the cost of living is going up. We’re only too aware with our weekly shops and electricity bills.

This follows 10 years of benign, easy-to-ignore inflation, but, in fact, we were not immune from it then. It is always there, slowly eroding the spending power of the Euro in our pocket and we should always be vigilant about how it impacts our financial security through retirement.

Although this inflation surge is lasting longer than first anticipated, and may get worse before it gets better, it is not expected to be long-term. But hopefully people will view it as an eye opener and take this long-term threat more seriously now.  We cannot predict what inflation will be in 10- or 20-years’ time, but we do know that even low levels can seriously reduce your spending power over time if your money does not grow at the same rate.

Inflation in Portugal and Europe

A year ago, in April 2021, Portugal’s Consumer Price Index was just 0.5%. In April 2022, it hit 7.2% – the highest rate in 29 years – a jump from March’s 5.3%. While much of this is down to high energy prices (26.7%), unprocessed food rose by 9.4%.

Across the EU as a whole, the Harmonised Index of Consumer Prices was 7.4% in March and April.

In the UK, the Consumer Price Index soared to 9% in April, with household energy bills reaching  record levels. You have to go back 40 years to find a higher CPI rate.

Will inflation remain high?

When prices began rising last summer, that was largely caused by the ‘base effect’ (inflation the previous year had been unusually low in the pandemic) and supply difficulties as economies exited from lockdowns. However, the crisis in Ukraine then exacerbated the issues, particularly with energy prices escalating.

The short-term outlook remains uncertain, with the ongoing Ukraine war and also concerns that renewed lockdowns in China could disrupt supply chains again.

European Central Bank Vice President, Luis de Guindos, sounded hopeful at the end of April when he commented that the Eurozone was close to reaching peak inflation. The Bank expects price pressures to diminish in the second half of this year, although energy costs are expected to keep inflation relatively high.

In the UK, however, the Bank of England issued a bleaker forecast. It had previously predicted inflation would peak at 8% in April, but on May 5 warned that inflation was expected to peak above 10% and not till the last three months of the year. It explained that the cap on energy tariffs means that UK inflation will peak later than other big advance economies. It then expects the CPI to fall to 1.3% in three years’ time.

In response to inflation, the Bank of England has raised its interest rate four times since December 2021. Its latest move on May 5 took interest rates to 1%, the highest since 2009 – but still a long way below inflation.

Inflation and your savings and retirement income

No-one is immune from inflation. We all need to plan to protect our savings and future income from the rising cost of living. Making sure your money lasts as long as we do should be an integral part of our financial planning for retirement.

If you’re retiring now at age 60, you need to plan for over 30 years of retirement. Unless your savings grow each year, they will buy you considerably less as the years go by.

As a basic illustration, if you have €50,000 in a current account with no growth, and inflation is 3% every year, after 10 years its value will have fallen to around €37,000. After 20 years, it’s around €27,500 and after 30 just €20,555. That’s a 59% reduction in purchasing power.

You, therefore, need to invest in assets that can be expected to produce enough growth to at least keep up with inflation. As we know from the last decade, bank interest rates cannot be expected to do this – in fact, many savers have been earning negative real rates of return.

While you may become more averse to investment risk in retirement, remember that inflation is also a big risk to your savings. You can reduce investment risk to comfortable levels by obtaining an objective calculation of your attitude to risk, then building a suitable well-diversified portfolio around your risk tolerance, time horizon, circumstances and objectives.

Holding your investment portfolio within an arrangement that is tax efficient in Portugal helps protect your capital from unnecessary taxation as well as inflation. Review your financial planning annually to have peace of mind about your future, then get back to enjoying your retirement years in Portugal.

HICP/CPI inflation data is at May 23, 2022.

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Dan Henderson

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Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and