Wednesday, December 6

Inflation can be lethal for Pedro Sánchez

Apart from impoverishing millions, day after day, inflation is the worst enemy of a government. Because it deteriorates its image more than any other economic phenomenon, more than unemployment or precariousness in the eyes of the majority, and because the only effective remedies against it revolve around the cooling of the economy. That is, the financial cuts, if not the price controls. The coalition government crosses its fingers that its forecasts are fulfilled. And, above all, that the thing is temporary and will return to normal within a few months. But it is not said that this has to happen.

The fact that the consumer price index grew 6.7 percent in December in the last twelve months is a terrible fact. Not only because it implies that households with less income, which are many, are crossing, and long, their line of resistance, that is to say, that inflation creates new poor people every day and aggravates the situation of those who already were. But because it alters the entire macroeconomic balance twisted by the Government.

If it were only one month, it could happen. But the process has been going on since March. With what the damage already done, not to add the one that will continue to come at least until mid-2022, which could be more, is already very substantial. The impact of the star measures adopted in recent months by the coalition government – the increase in the salary of civil servants, the improvement of pensions, the increase in the minimum wage, even the moderate control of the price of rents – has already remained. seriously diminished by the inflation of these past nine months.

Even the labor reform itself could be questioned. Because its main objective is the social peace that would derive from the improvement of the contractual conditions that the unions have just achieved. But, what will this longed for social peace remain if inflation causes an increase in labor unrest aimed at reducing the impact of inflation on wages to a minimum?

Ordinary people care very little that they are told over and over again that the gas prices are to blame, which some malevolent international agents insist on raising above all logic. Or that in the rest of Europe, and to a lesser extent also in the United States, they have similar problems with prices, although perhaps a little less than in Spain. Because what only citizens see is that their government is unable to stop the process.

The increase in the price of gas is undoubtedly a solid reason when it comes to explaining the inflationary pressure that Spain is suffering. The serious problems that for months have been registered in the global supply chains of essential goods for the production of final goods – starting with the chips that are needed in all sectors – also explain the phenomenon.

The increase in food prices, another reason for current inflation according to the INE, has more confusing profiles. Because, are not the militants of the agrarian organizations protesting more and more intensely, with the right behind their mobilizations not infrequently, so that their prices are raised to face their increasing costs, especially those of fuel? If that is what is demanded, it will be because it has not been achieved. So why are food prices going up? Someone would have to explain.

But without going into details there is something that seems obvious. And the pandemic has been an unprecedented blow to the economy: in 2020, the Spanish GDP fell by 11 percent, a figure whose only precedent is the economic disaster that almost 80 years ago caused the civil war. It is a miracle that the consequences have not been worse, having been very bad. But the end of that collapse could not be a party either, although some have wanted us to believe that it was going to be like that.

Because the only way to reactivate an economy as sunken as the one that existed a year ago was by taking the risk of heating it up. With easy money – which the European Central Bank has provided, with its massive purchases of debt and keeping interest rates at zero – and avoiding any type of restriction on economic activity. It had to be like this. There was no other way and that effort has been quite restrained. But its side effects could not be avoided.

An example is what happens in the housing sector. After a year or so of collapse, when it began to recover it did so with its prices rising. In the new house and in the second-hand one. And so it goes. To the point that international organizations have already warned of the risk of a new real estate bubble in Spain.

But without going so far, this trend has occurred in many other sectors, large and small and medium-sized companies. After having had such a bad time, is it not understandable that entrepreneurs and shopkeepers try to recover by also raising their prices? World tourism organizations are already warning that when travel really begins to recover, which will happen not long after because everything indicates that sooner or later the pandemic will be overcome, prices will rise. Starting with the planes.

It is clear that, for our Government, as for any other, the number one priority is economic recovery and the reduction of the unemployment rate. But if this is achieved in politically useful deadlines, that is, before the next general elections, will the effect of this success be canceled out by the public unrest that it is causing and will it cause the increase in prices?

With an additional reflection on that dilemma. The one that, if inflation does not give way, the stimuli will end in order to cool the economy. The heads of the international financial institutions have already warned, and the ECB’s debt purchases have already begun to be cut. If that drastic policy change occurs, it won’t be anytime soon. But if inflation doesn’t subside, it could take place before the end of this year. That is, on the eve of the general elections.