• The Government admits that it does not know when fresh food will stop rising and trusts that processed foods will stop in April
  • Household savings are exhausted: halved by inflation and anticipate a slowdown in consumption

Inflation has been around 6% in recent months, which means that on average prices are 6% more expensive than a year ago. However, in this month inflation could surprise downwards and plummet to around 3%, without this implying that prices are alleviated, by the so-called "step effect", that is, by comparing with the first month of last year in which the impact of the war in Ukraine was already felt.

It is what could be called the "Ukraine effect", that is, the comparison with an unusual month for prices that distorts the series. We must bear in mind that the evolution of the CPI is what allows us to know how inflation fluctuates in Spain and, specifically, it is its year-on-year rate (the level of prices we have each month compared to the prices of the same month of the previous year) which allows us to know if price increases are accelerating or moderating.

In February, for example, inflation stood at 6%, which means that prices were on average 6% higher than in February 2022, but in February of that year, prices had already risen by 6.1% compared to the same month of 2021. In February 2021 they remained unchanged from February 2020, because Spain at that time did not yet have an inflation problem. Price increases are accumulating, which means that between February 2020 and February 2023, prices have risen in Spain by 14.1%, according to the INE, and even though inflation moderates this means that prices rise less, but not that they stop rising, nor that they fall.

Last year, prices rose in January by 7.6% year-on-year and in February, by 6.1%, but Russia's invasion of Ukraine in February caused a jolt on the international price board, mainly due to the restriction of supply of energy products. In Spain, this shock meant that inflation soared to 9.8% in March: prices that month were almost 10% higher than in the same month of the previous year and, in monthly terms, there was a rise in prices of 3% compared to February.

The European Central Bank (ECB) considers that the healthy thing for the economy is that prices rise by a maximum of 2% in a year, so a price increase of 3% in a single month is really worrying.

However, that skyrocketing inflation of March last year will now benefit us, since when comparing the prices of now with those already very high of last year, the resulting inflation will be lower. It is better understood with an example: imagine that Spanish households only bought rice, so the evolution of its price would mark the evolution of inflation.

A kilo of rice that in February last year cost 1.50 euros, went on to cost 1.55 euros in March, and that price was 9.8% higher than in March 2021. Throughout the year rice has continued to rise until last month it cost 1.59 euros in the supermarket, 6% more than a year ago. In this month of March, rice could rise again, for example one cent, from 1.59 euros to 1.60 euros, and yet inflation would have fallen to 3.2%. The rise in the price of one cent in rice compared to February and five cents compared to March last year translates into a fall in inflation of three points. Why? Because in March 2022 rice hit a high to 1.55 euros.

This drop in inflation, which could be known this Thursday when the INE publishes the advance inflation data for March, will therefore be a statistical effect, independent of the true evolution of prices and, in fact, could be reversed in April. "A significant decline is expected for March, due to a strong step effect in energy products. However, in April there will be another step effect in the opposite direction that will raise the general rate again. The performance of various step-by-step effects throughout the year in different senses -favourable in the central months of the year and unfavourable in the final months-, as a result of the high volatility of energy during 2022, will mean that the year-on-year rate expected for December will be higher than the annual average, 5.2%. On the other hand, the average annual rate expected for the core index has risen from 6.2% to 6.5%," says Funcas. Its experts believe that the CPI will fall to 3.4% in March and rise again to 4.5% in April.

In the same line has been shown the first vice president, Nadia Calviño, who warned on Tuesday of "episodes of volatility" in the year-on-year rate of inflation in the coming months.

The GDP deflator overtakes the CPI

In recent years in Spain, the GDP deflator – which measures the evolution of the prices of the whole of domestic demand, that is, of what is produced within the country – has remained below the CPI – which measures the consumer prices of resident families, including the consumption of products imported from other countries. like energy or fresh food. Since the 2008 crisis, the deflator has been around 0.5 or 1 point below the CPI.

"The only way to grow was to increase market share abroad and that is why we went from an environment in which we exported inflation to another in which we exported deflation, in the sense that there is a constant gain in competitiveness in the Spanish economy because our price increases are lower than those of the rest. This was accentuated in 2020 and 2021 by the fall in demand for a sector as important as tourism: prices were adjusted by 30-40% due to restrictions, so that the price of what was produced in Spain was adjusted much more than the price of what was produced externally, "explains Miguel Cardoso, Chief Economist for Spain at BBVA Research.

Despite the increase in costs, companies have not transferred it to prices in order to continue exporting and be competitive internationally, which is why the GDP deflator has remained below the CPI (in 2022, the CPI closed on average at 8.4% and the deflator, at 4.5%). Now, however, experts detect a change in trend: "Companies have seen that this rise in costs is not temporary, it is permanent, and that there has been a fall in the price of gas but it is still well above what was observed two years ago. The increase in costs is permanent, so they are beginning to transfer to prices much of this increase in costs and it is not affecting their exports because they are with a strong demand, "explains Cardoso.

Therefore, by 2023 they expect the deflator to exceed the CPI, standing at 5.2% compared to an average inflation of 3.9%.

"The moderation of energy prices (mainly imported) slows down the total CPI even when domestic prices continue to advance at the same pace," says Raymond Torres, director of Economic Situation at Funcas, who believes that one of the reasons for this change is the time lag which occurs between the moderation of imported prices and that of production: "There is a diluted impact over time of imported prices on domestic prices."

The same thesis is maintained in the Ministry of Economy, where they believe that we will have to wait to see how both indicators converge.

Although the prices exported by Spain will rise more than the increase in those it imports, the BBVA Research expert warns that it will not necessarily mean a loss of competitiveness, since the GDP deflator in other countries is rising at a faster pace. "The key is to see that differential and at least for the moment it remains favorable to Spain," he says, around 1%. "We have 15 years of competitiveness gain, so I wouldn't worry if we had a negative differential one year. We have become accustomed to these improvements in competitiveness and companies are taking advantage of it to gain market share in sectors such as pharmaceuticals, equipment machinery, automotive ...", he says.

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  • GDP
  • Nadia Calviño
  • INE
  • Inflation
  • Ukraine