The rise in inflation and interest rates affects households’ budgets, but its impact differs depending on the characteristics of households, in particular their income level. The impact of the strong increase in food and energy prices is more pronounced for lower-income households, reflecting the larger weight of these goods in their consumption basket. Households with variable rate debt (around 30% of all households) are especially affected by the interest rate shock. 

Granular information from household surveys, with emphasis on the 2020 Portuguese Household Finance and Consumption Survey, was used to simulate the distributional impact of these shocks on households’ financial situation. For 2023, the average increase in disposable income of indebted households is projected to be similar for all quintiles, around 6%. For indebted households in the highest income quintiles, this change in income allows them to maintain the volume of consumption of food and energy and meet the debt service, without jeopardizing other types of expenditure. However, for indebted households in the two lowest income quintiles – which represent 7.5% of all households – the average change in income does not cover the increases in expenditure on food and energy and in debt service, implying a more demanding adjustment.

For more details see Box 4 "Effect of inflation and rising interest rate on the financial situation of households" in the Economic Bulletin of Banco de Portugal, December 2022.

Prepared by Luísa Farinha and Cristina Manteu. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.

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