Inflation in Spain at its peak: “it will not return to 10%”

Inflation has a tendency to leave sore those who dare to speculate on its movements. For several months into 2021, the president of the European Central Bank, Christine Lagarde, and her counterpart at the Federal Reserve, Jerome Powell, – arguably the two people with the most information to know the progress of the economy –, announced temporary price increases. a phenomenon that has ultimately proved more permanent than expected, partly also due to a war like the one in Ukraine that few could have foreseen.

The end of the year, however, marked something similar to a trend in Spain: four consecutive months of moderation in the CPI as inflation slowed from 10.8% in July to 6.8% in November, thanks to a drop in electricity tariffs. , and to some extent due to the decline in barrels of oil and public assistance to control the price of fuel.

“Spain’s inflation will no longer reach the rate of 10% that we saw in the summer months,” says Javier Ibanez de Aldecoa, an economist at Casabank Research. His opinion is shared by more than half a dozen experts. “It looks like we are past the worst, especially in Spain, where the downward trend is much more pronounced than in the euro area,” affirms Ángel Talavera, chief economist for Europe at Oxford Economics. It is less clear in countries with a single currency that they have seen the maximum: prices fell to 10.1% from 10.6% in November, the first decline in 17 months. And the European Central Bank predicts a long journey back to normality: It calculates average inflation of 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025.

Maria Jesús Fernández, a senior economist at Funcas, has a long list of arguments that inflation has turned around in Spain. He points out that the number of CPI subcategories that grew at more than 6% in recent months has flattened, and the industrial price index excluding energy has peaked. These include a fall in oil and gas prices from this year’s highs, relaxation of constraints in supply chains and a sharp reduction in ocean freight traffic, through which most goods move. Also remember that monetary policy is not yet in effect. “The effect of the interest rate hike has not yet been reflected in demand or the economy as a whole, and we expect the effects to be visible over the next spring,” he predicts.

Once a certain consensus is reached – always stellar and full of caution – in considering the worst of the inflationary crisis in Spain, the key question now for Talavera is how long it will take for prices to return to normal levels. Normal, As central banks indicate, this would mean that inflation would rise by around 2%. “The service sector is probably the one that will take the medium to longest time, and a return to normalcy will also depend on wage growth next year,” he says. For now, it doesn’t address the dreaded second round effect or any spirals of wages and prices that feed into each other.

However, this risk is on most experts’ list of hazards. Another is the strong growth in food, which, unlike energy prices, is not deflating for now—they rose more than 15% in October and November—as explained by Funkas, director of economic conditions at Raymond Towers. Is. “Food is skyrocketing, not only because of increased energy and fertilizer costs. Structural factors such as weather conditions across Europe, declining supplies from some exporting countries and perhaps the recombination of production chains also have an impact.

Miguel Cardoso, Spain’s chief economist at BBVA Research, sees geopolitical factors as a threat. “This is most important: it is the core, which has engaged the economy in the process. If tensions escalate and this leads to less supply in energy markets, there will be new pressures on inflation”, he warned. The Asian giant’s awakening after parking the restrictive Covid Zero measures could also be seen if its overseas purchases pick up, its factories operate at full speed and its tourists fly again. “A strong recovery in the Chinese economy could reverse some of the adjustments currently seen in fuel price. The exit from confinement policies and what this means for the displacement and normalization of Asian production could be crucial”, he pointed out.

In a Spanish key, he cites among the potential problems the impact of the drought on the price of some food items, the effect of the execution of the European recovery plan on demand for materials such as metals and cement, as well as on labour. Some point where this may result in short supply, and eventually excessive increases in business margins and wages that shift the burden of costs to consumers. The best remedy against this, they believe, is to go ahead with the rental agreement.

number of experts

For now, these downside scenarios don’t seem advanced enough to reverse the trend, although that doesn’t mean prices will return to normal overnight, far from it. Ignacio de la Torre, chief economist at Arcano Research, estimates that average inflation in Spain in 2023 should be about half that of 2022 “although there will be volatility linked to the price of gas, in turn influenced by geopolitical events, such as gas prices”. The threat of Russia cutting another gas pipeline”, he qualifies.

According to a forecast from BBVA Research managed by Cardoso, Spanish CPI could average around 4% in 2023 – still twice the ECB target – but the underlying will exceed 5%. “This shows that the increase in food and energy costs seen this year is not expected to be repeated again, even though a reduction may be seen,” he explains. CaixaBank Research runs with similar numbers, calculating an average headline inflation of 4.5% and a proximate inflation of 4.8% for next year.

Those are predictions, but as Matilde Maas, a professor at the University of Valencia and director of international projects at the Ivy, points out, few people can fan a fire about whether 2023 will pass without surprises. “If the world behaved as we have become accustomed to since the creation of the monetary union, everything would point to a progressive slowdown in inflation. The problem is that in 15 years we have three black swans. One each will serve to mark the decade,” he says, pointing to the Great Recession, the pandemic and the war in Ukraine.