The indicator that continues to cause the most headaches for both the Spanish government, and consumers, is inflation. After saying goodbye in May to 8.7%, four tenths higher than April, the CPI soared to 10.2% in June. This double-digit rate has exceeded all expectations and is the highest since April 1985. It is much higher than the 9.8% mark it reached in March.
Prices rose 1.8% in June, compared to May. This is the highest monthly increase since 1977. Even more concerning is the fact that prices rose 1.8% in June compared to May. This was the largest increase in a single month since 1977. Core inflation rate, which excludes unprocessed foods and energy products, has increased to 5.5%. This is six tenths higher than the figure for the previous month and the highest level since August 1993.
According to the National Institute of Statistics (INE), the primary cause of the CPI’s rise is once again fuel and food prices. These data will be confirmed by the INE in mid-July. However, everything goes up. The indicator has also been influenced by cafes, hotels, and restaurants.
Advance data that has outperformed all market forecasts places the economy in an extreme impasse, as the Executive and the economy are left in no position to respond when the price rise continues. Pedro Sanchez, the President of Government, acknowledged Wednesday that the data was known on Wednesday “demonstrates how serious the situation of both the European and Spanish economies” and defended the “appropriateness” of the measures taken as well as the need for reform in the electricity market.
Experts warn, however, that the ceiling may not have been reached due to the rapid rise in energy prices. According to the Bankinter analysis, the prices continue to rise and the impact of energy prices on the calculation for the Iberian exemption that started in the middle month is not yet evident. However, the Bankinter team has announced new measures such as the reduction in VAT on electricity (to 10% from 5%) which will take effect in July. They insist that if we include this data in our current projections, the average year-end would be higher than the 7.4% originally estimated.
Core inflation, which doesn’t take into account fresh food or energy, was 0.2% a year ago. The general CPI, however, is 2.7%. This gives you an idea of the changes in the situation. It began to rise in June 2021. In September, it was at 1%. Two months later, it had already reached 2.1%. It was at 3% in February when the Ukraine war began. In May it reached 4.9%, but it has now risen to 5.5%, which is its highest rate since August 1993.
Pedro del Pozo is the director of financial investments at Mutualidad de la Abogacia. He explains that beyond temporary problems of food and energy, what the underlying data tells us, there are also more structural problems in the formation of Spanish prices, second-round issues that have to do with the cycle wage and price formation>>.
Although data from June is not broken down into product categories, it was evident that basic products such as oil (almost 45% higher than last May) and bread (12.6% more) have seen an increase in prices in May.
A Kantar survey has revealed that Spanish families are suffering from rising food costs. 4% of Spanish households claim they cannot afford basic food items that they used to be able to buy. We believe these rising prices will have an effect on consumption. However, the summer season could delay this effect. It is evident that the last half of the year will see a significant contraction in consumption, says Javier Molina of eToro, a spokesperson for Spain’s investment platform.
According to the Government, the approved measures include the gas cap and anti-crisis plans (both the existing and extended measures) that will limit the price rise by 3.5 percentage points. This data would not match what the INE gathers month-by-month in the so called CPI at constant price, which reflects the behavior of the indicator when there are no measures.
Inflation was, in fact, a recent battle horse between Economy and the statistical institution, which ended with Juan Manuel Rodriguez Poo’s resignation as the head of the institution.
The Executive has censured the INE for not including in its calculation of the indicator the free electricity rate (the one customers agree to with the companies). This excludes the regulated rate directly tied to wholesale prices. This would affect the CPI’s rise. Although the INE claims that it has worked for a while to be more accurate in this area, it alleges that it is extremely difficult to get this data from electricity companies.
The central banks are now aiming to end inflation, which they had only months ago called “temporary”. They were proved wrong by the passage of time, and the major monetary institutions have been forced to accelerate the withdrawal of stimuli, prioritize fighting rising prices, even though that may mean generating an economic recession.
Christine Lagarde (CEB President) assured this week that the bank is prepared to go “as far and as necessary” in order to ensure that inflation stays at 2% over the medium-term in the region. Lagarde believes that the European Central Bank will be able to raise interest rates as needed by using the tool to fight fragmentation in the euro zone markets.
