Wednesday, May 25

Prices definitively climbed 9.8% in March, a record since 1985, for electricity, gasoline and food

Inflation accelerated 9.8% in March in Spain compared to the same month last year, in line with the data advanced by the National Institute of Statistics (INE) two weeks ago. This is a record for the Consumer Price Index (CPI) since 1985, after the increase, also year-on-year, of 7.6% in February. The IPC has now been above 5% for 6 months.

The limit on the price of gas at 30 euros “will sink inflation”, according to experts

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The extraordinary rate of inflation in March responds to the disturbance caused by Russia by invading Ukraine in international markets, which began to become tense from the end of 2021 due to this serious threat, to the point of literally condemning the country to a war CPI during the last few weeks.

Inflation reflects the rise in the prices of electricity, gas, fuel, important raw materials for industry such as aluminum or steel, and cereals in which Russia and Ukraine are key players worldwide. And this March added the supply problems due to the stoppage of road transport, justified precisely by the increase in costs, which impacted basic foods such as milk, oil or flour.

Serve an example to understand inflation. If a year ago, in March 2021, a family spent 1,000 euros to cover all your needs: pay rent, bills, go out to dinner one or two days, go to the supermarket and buy some clothes. If this year he had bought the same products, gone to the same restaurants and purchased the same items, he would have paid 1,098 euros, according to INE data. This difference (9.8% more) is what has changed, on average, the price level of consumer goods and services in Spain in the last year, measured according to the CPI.

In monthly variation, compared to February of this year, inflation increased the rhythm of nearly three points. In this case, a maximum is established since 1977, in the midst of the oil crisis.

And if the core CPI is observed, which measures the evolution of prices by extracting the most volatile products from the shopping basket, such as electricity and food, it accelerated 3.4% in March, compared to the same month of 2021 , a record since 2008, after accelerating another 3% in February.

A calculation distorted by electricity

The absence of electricity prices from the free electricity market (contracts according to the rates of the trading companies) in the general calculation of the CPI (Consumer Price Index) made by the INE distorts the official inflation statistics. Specifically, it would be overvaluing the electricity bill over the rest of the shopping basket, according to different comparisons and approximations with respect to the Eurostat figures (the INE of the European Union).

There is different evidence that allows us to conclude that the electricity bill is currently adding more than it should to the general CPI. First you have to stop at the source of the distortion. The current calculation of the INE exclusively includes the prices of the regulated market (more volatile when responding to the generation of daily electricity), directly conditioned by a system that is set with respect to a gas triggered in recent weeks in the international markets due to the disturbance of war.

Then, by comparison with other data or with other countries, the effects of excluding free market prices in the statistics can be observed, which the INE itself has been trying to include for months, “but we have found problems with the information that companies contribute to us”, they recognize from the institution. The first announcement advanced the incorporation of the rates offered by the electricity marketers to the calculation in January 2022. Now, sources familiar with the process delay it until the beginning of 2023.

The limit on gas “will sink inflation”

The joint proposal by Spain and Portugal for a maximum price of 30 euros per megawatt hour (MWh) to make electricity cheaper will “sink” inflation, experts agree. This limit on the price of gas “until December” burned by combined cycle plants, within the framework of the mechanism for the “Iberian exception” agreed by the European Council, must be approved by the European Commission and would have “a very significant impact and automatic on the CPI (consumer price index)” and the current escalation of prices, according to Ignacio Conde-Ruiz, professor at the UCM and deputy director of Fedea.

The measures of the Shock Plan that the Government has already been able to approve -such as the fuel discount- will alleviate inflation by nearly one percentage point, according to the Funcas analysis center, which forecasts an average CPI in 2022 of 6.8% . The Bank of Spain takes this same estimate to 7.5%. Meanwhile, the Independent Authority for Fiscal Responsibility (AIReF) leaves it at 6.2%.

A climb from a year ago

Inflation had been increasing its pace since the spring of last year due to the bottlenecks in world trade due to the difficulties in world supply to reactivate and meet the explosion in demand after the pandemic, having to overcome intermittent restrictions for health reasons. The last important one, the confinement of Shanghai, the financial capital of China, during the last weeks.

While the interannual CPI for February 2021 was slightly negative -compared to 2020-, in March of last year it advanced by 1.2%, which aggravates the acceleration of this month of March 2022.

Inflation takes its toll on the poorest

Inflation rages on the poorest families. According to different studies carried out with Eurostat data for the eurozone as a whole, the lowest incomes are the ones that dedicate the most money with respect to their total spending on basic goods and services, which are the most stressed.

Specifically, according to calculations by the debt rating agency Moody’s, the fifth part of European families with the least disposable income spends 15% on food and 7% on electricity and gas supplies and on different fuels. Meanwhile, the highest incomes spend only 11% and 4%, respectively, of their total spending on these same products.

“These products have a very rigid demand that makes it difficult to find substitutes (one can stop going on vacation if it is too expensive, but it is more difficult to limit heating in the winter months, for example), so the rise in Inflation is having an uneven impact by income brackets”, points out Rita Sánchez Soliva, an economist at Caixabank Research, in a recent report.

“The perverse effects of inflation on the lowest incomes are devastating, because they dedicate a greater proportion of their wages or income to basic products”, agrees Professor Josep Bertran, who adds, on the other hand, that “the higher the inflation, more VAT is paid, since the same percentage is recharged on a higher price”.

Moody’s analyst team demonstrates in a historical analysis that “when oil prices rise, consumer spending on food is more resilient than other spending.” In short, and in line with the example of Rita Sánchez, it is easy to postpone the decision to enjoy a cruise in an inflationary context, but you cannot do without buying bread.