Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average

consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. In economic terms inflation is usually calculated as the percent change in the Consumer Price Index (CPI) from one year to the next. The CPI represents the prices paid by the average urban consumer in each respective country. Inflation can also be calculated with other price indexes such as the Produce Price Index or the so-called GDP deflator. Most countries try to keep inflation somewhere around 2-3 percent per year. That is too low to cause any problems for the businesses and households. At the same time, it is comfortably away from negative inflation, i.e. from deflation. Of course, this target is often missed. The disinflation experience of the Portuguese economy, while a gradual and continued process in the reduction of the inflation rate, began in 1990 when Portugal adopted a nominal stabilization policy of the Escudo in view of other countries currencies with a long tradition related to price stability, where the Deutsch Mark was seen as a reference currency. Figure 1 shows the evolution of the Portuguese and German inflation rates in the periods between 1979 and 1998 and between 1990 and 1998.

As it is easily observed, after the rise of the inflation rates in the beginning of the 80s, the Portuguese inflation rate reached a maximum value of about 28% by the end of 1983. Such a high rate inflation, reflected the successive devaluations of the exchange rate in an attempt to maintain the foreign competitiveness of the Portuguese industry. After ten years, Portugal sees its value reduced to about 5%, and continuing this dropping route up until today. This disinflation process is associated to the adoption, by the Portuguese monetary authorities, of a nominal stabilization policy of the Portuguese Escudo, in the context of its participation in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS). The exchange rate policy was therefore favoring the anti-inflation goal leaving behind consensus about reinforcing foreign competitiveness of the Portuguese economy.

In fact, in the period prior to Portugal adhesion to the European Economic Community (EEC), the exchange rate regime was characterized by the maintenance of a crawling peg regime of the Escudo. However, the success of the integration in the European market was deeply dependent on the capacity of the monetary authorities to reduce the inflation rate to the levels presented by Germany. In this context, in October 1990, the crawling peg policy was replaced by a policy based on a limited floatation of the Escudo in relation to the five main currencies of the ERM of the EMS. Portugal began, then, adopting an exchange rate policy based on the nominal stability of the Escudo. Since the Portuguese inflation rate registered a high convergence rate to the European levels, the Portuguese government decided to propose the incorporation of the Escudo in the ERM of the EMS, becoming effective in April 1992. The discipline of this mechanism functioned as an anchor of the disinflation policy. Nevertheless, in September 1992 we witnessed a deep crisis in the EMS translated into a succession of some realignments that culminated with the expansion of the foreign exchange floatation bands to fifteen % (15%) in August 1993. In this context, the Escudo ended up by devaluating in 6% and 6.5%. Nevertheless, the Portuguese Escudo realignments didnt aim at changing the generic option for a foreign exchange stability policy that was being followed. It is now important to analyze some of the costs and benefits associated with the disinflation process. Due to this strategy, the Portuguese economy was also able to reach successfully the main goal of price stability, that was explicitly assumed by the political authorities. In 2001, no doubt inflation rate almost reached 5% but deflationary policies again brought it down to between 2%-3%, with the exception of .83 % in year 2009. The main thing to appreciate that Portugal has maintained it inflation rate well with range when compared with other influential countries. Nevertheless, it should also be mentioned that as a result of the disinflation process there was a loss of Portuguese competitiveness due to the real appreciation of the Portuguese Escudo, limiting, thus, the product growth.

Portugal was the worlds richest country when its colonial empire in Asia, Africa, and South America was at its peak. Because this wealth was not used to develop domestic industrial infrastructure, however, Portugal gradually became one of western Europes poorest countries in the 19th and 20th centuries. From the mid -1970s, after the Portuguese revolution, the countrys economy was disconnected from Portugals remaining overseas possessions in Africa and reoriented toward Europe. In 1986 Portugal joined the European Economic Community (ultimately succeeded by the European Union [EU]), spurring strong and steady economic growth. Similar to those of other western European countries, Portugals economy is now dominated by services; manufacturing constitutes a significant share of output, while agricultural output is relatively minor, accounting for less than 3 percent of output. In the early 21st century, economic growth had improved living standards dramatically, raised incomes, and reduced unemployment. In addition, since Portugals accession to the EU, large inflows of structural funds, private capital, and direct investment have fostered and sustained development. Portugal was one of the countries hardest hit by the euro-zone debt crisis that erupted in 2009, however, and a raft of government measures proved ineffective at halting the c ountrys economic meltdown. In 2011 the EU and the International Monetary Fund authorized a 78 billion (about $116 billion) bailout package for Portugal, contingent on the adoption of strict austerity guidelines.