What is inflation?
Inflation is a general and persistent increase in prices of goods and services consumed by households.
In a market economy, prices of goods and services can change at any time: some prices go up, others go down. Inflation occurs when the prices of goods and services increase in general (not just the price of some specific items) and this increase is sustained over time.
Why should we worry about inflation?
Inflation makes it possible to understand how the prices of goods and services that households buy regularly, such as food or clothing, change over time. By monitoring these changes, you can calculate how much money you need to spend more or less of to buy the same products.
When prices stop rising
At first sight, the absence of inflation may seem positive because prices stay the same. However, when prices stop rising, deflation may arise, a situation where most prices fall over time. Deflation can mean households and firms delay spending and eventually harm the economy.
Example
When the price of cars is expected to fall, consumers interested in buying a new car may delay buying one while waiting for the right price. Lower sales lead to a fall in production by firms which, in turn, can reduce investment and even jobs. With lower employment and income, consumption will continue to decrease and may lead to increasingly weaker growth or even a recession.
High inflation
On the other hand, high and unstable inflation reduces purchasing power and increases unpredictability, making it harder for households and firms to plan their spending.
That’s why low, stable inflation – i.e. price stability – is what benefits the economy and contributes to the well-being of citizens.
The role of these data
Inflation data help policymakers, economists and firms to make more informed decisions. In the euro area, these data are also crucial for the European Central Bank (ECB), which, together with the national central banks, sets monetary policy with the aim of maintaining inflation at 2% in the euro area over the medium term. The ECB adjusts interest rates and, if required, uses other measures to ensure stable prices and a healthy economy.
Consumer prices
Consumer prices are the prices people pay for the goods and services they consume, such as food, clothing and footwear, transport services or leisure activities.
These prices change over time and vary depending on where and how the purchase is made. A garment, for instance, can cost more or less in line with the brand, shop, season (such as sales) or even the quantity bought.
In a market economy, prices result from the balance between supply, i.e. the quantity of products available for sale, and demand, i.e. how much consumers want and can buy.
Along the production and distribution chain, various types of prices influence the final price paid by consumers:
Producer prices
Which reflect manufacturing costs.
Resale princes
Which determine how much retailers pay for goods.
Import prices
Which determine the cost of goods purchased abroad.
Export prices
Which can influence domestic prices.
Together, these factors contribute to the final price paid by consumers.
(Harmonised) index of consumer prices
Consumer price indices are the most commonly used indicator by economists and central banks to monitor developments in an economy’s general price level.
The Consumer Price Index (CPI) is calculated by the national statistical institutes based on a representative basket of goods and services typically consumed by resident households in each country.
In the European Union (EU), the Harmonised Index of Consumer Prices (HICP) has been created on the basis of an identical shopping basket for all countries and the same calculation methodology, making it possible to compare across countries. The composition of the HICP is designed so that the overall basket is representative across all countries. The HICP is the index used by the ECB to assess price stability in the euro area.
The CPI and the HICP also differ in what they cover. The CPI only includes expenditure by resident households in the country, while the HICP also includes expenditure by non-residents (such as tourists). Thus, the main difference is the weight of the various components in the index. Take, for instance, class “11. Restaurants and hotels” (particularly affected by tourist spending) has a lower weight in the CPI than in the HICP.
As of January 2026, version 2 of the European Classification of Individual Consumption According to Purpose (ECOICOP 2) is used to describe the different product types used to calculate the HICP. This classification is used by all EU countries, both for the calculation of the HICP for each country and for the euro area and EU aggregates. In Portugal, ECOICOP 2 is also used to calculate the CPI.
This is a comprehensive list comprising all types of goods and services, divided into 13 classes.
Food and non-alcoholic beverages
Alcoholic beverages, tobacco and narcotics
Clothing and footwear
Housing, water, electricity, gas and other fuels
Furnishings, household equipment and routine household maintenance
Health
Transport
Information and communication
Recreation, sport and culture
Education
Restaurants and hotels
Financial and insurance services
Personal care, social protection and miscellaneous goods and services
CPI and HICP items are also combined into special aggregates, which are useful for analysis. These aggregates make it possible to track consumer price developments by types of products, such as goods and services, and to identify types of products whose prices tend to be more volatile, such as energy industrial goods.
- Total
-
Goods
FoodUnprocessed foodProcessed foodIndustrial goodsNon-energy industrial goodsEnergy industrial goods
- Services
-
Aggregates excluding components
Total excluding unprocessed food and energyTotal excluding housingTotal excluding energyTotal excluding unprocessed food
How do we measure inflation?
By calculating the rate of change in the HICP or CPI between two periods, we get the inflation rate. This indicates, as a percentage, how much prices have changed from one period to the next. Given that it is possible to compare between different periods, we can analyse various types of inflation rates:
Year-on-year inflation rate
The year-on-year inflation rate is the change in the HICP/CPI between the current month and the same month of the previous year. This is the rate most commonly used by economists and central banks to analyse inflation developments on a month-by-month basis;
where t corresponds to the reference month
Month-on-month inflation rate
The HICP/CPI inflation rate of change from the previous month (month-on-month changes) is of limited use, since the indices are generally not seasonally adjusted. For instance, price changes between two consecutive months may be distorted by phenomena that typically occur in some months of the year but not in others (such as sales);
where t corresponds to the reference month
Average inflation rate
The average inflation rate is the average change in the HICP/CPI over the past 12 months relative to the average of the immediately preceding 12 months. Average inflation is smoother and can be useful for analysing the trend in price developments.
where t corresponds to the reference month
There are also complementary inflation measures that help us tell temporary changes apart from more lasting movements in the general price level. Given that the prices of some of the goods that make up price indices are more volatile (e.g. certain food or energy), some measures exclude them to factor out this effect (e.g. core inflation). In order to exclude very extreme changes in the prices of some goods or services, we calculate measures that remove the largest increases and decreases, such as trimmed mean inflation.
Where can I find information on inflation?
The BPstat Prices domain has information on the consumer price index and the harmonised index of consumer prices for Portugal and the euro area. This information is updated monthly and available for the total basket of goods and services consumed and for the various aggregates of goods and services.