Alejandra Olcese

Updated Thursday, March 28, 2024-02:03

  • March Inflation climbs to 3.2% in March due to the return to the 21% VAT after three years

The dynamism of

employment and wages

, the reestablishment of the usual

VAT

tax rates on electricity or food and price increases in the

service sector

could make it difficult for Spain to manage to bring

inflation below 2%

- the level pursued by the European Central Bank (ECB) because it is considered healthy for the economy - at least in 2024 and 2025.

As published this Wednesday by the INE, inflation has picked up again in March and stands at

3.2% year-on-year,

four tenths above the February level, while in a month-on-month comparison it has registered an increase of 0.8% in a single month.

"Data released today shows that Spanish inflation rebounded to 3.2% in March. We believe it

is likely to rise further in the coming months

due to base effects on energy inflation, higher VAT rates on energy and food, as service companies are raising prices. In addition, the rigidity of the labor market suggests that inflation could remain above 2% for the next few years," says

Adrian Prettejohn

, European economist at the consulting firm

Capital Economics.

Their forecast coincides with that of

16 of the 19 study services

that make up the Funcas Panel, which predict that inflation will still close in

2025

with an

average higher than 2%

. Among them, the Economic Studies Center of Madrid (attached to the Rey Juan Carlos University) stands out as pessimistic, which predicts an average increase in prices next year of 2.8%; the Institute of Economic Studies (IEE), which places it at 2.7%, and the Spanish Chamber of Commerce, which believes it will be at 2.6%.

When unemployment has been below 13%, inflation has been above 2% and on average around 3.5%

Capital Economics

There is only one organization that is confident that inflation will drop below 2% next year: the Loyola University of Andalusia, which puts the figure at 1.7%, while Oxford Economics and Mapfre Economics predict that it will average just 2%. These forecasts are in line with those of the

Bank of Spain

, which projected in its latest report on the Spanish economy that prices would rise

by 2.7% this year and 1.9% next year.

Those who believe that inflation will encounter

resistance

to continue decreasing argue, first of all, that the dynamism of the labor market will make it complicated. "Historically, when unemployment has been below 13%, inflation has been above 2% and on average around 3.5%. The current unemployment rate is 11.8% and is likely to fall in coming quarters as the economy is posting strong growth and companies report increasing employment. This suggests that

inflation will remain above 2% for some time yet,

and will likely be

well above that figure

," predict from Capital Economics.

Reasons for concern

The experts of this firm argue that the labor reforms approved in recent years do not seem to have displaced the "

Phillips curve

", that is, the relationship that exists between unemployment and inflation (since, theoretically, to boost employment there is have to make a sacrifice in terms of more inflation, and vice versa). "The relationship between the variables has practically not changed since the global financial crisis," they point out.

The

Bank of Spain

also sees a possible risk in the labor market for its price forecast to be met: "Looking to the future, the decline in inflation is expected to continue over the coming quarters, although at a slower pace. especially in advanced economies, somewhat more moderate than in 2023. However, these prospects

depend

, to a large extent, on

the dynamism of business margins and wages

remaining relatively contained and on no additional deterioration occurring. of the global geopolitical situation that could give rise to new distortions in global trade and increases in the prices of energy raw materials".

Business margins have already recovered their pre-pandemic level, but their behavior

is

heterogeneous and in some sectors they have grown above average; while

salaries

and, above all, labor costs, are growing strongly. "The average salary increases agreed in the agreement (2.8%) are still slightly below the criterion included in the V Agreement for Employment and Collective Bargaining (2022-2025), which establishes 3% for 2024, with a review clause of one additional point in the event that the CPI exceeds this increase.

UGT

considers it essential to increase the volume of workers

protected by salary review clauses

, whose current coverage is 35%, well below the levels achieved before the 2008 crisis, which fluctuated around 70%. It is a fundamental tool to protect workers from unforeseen deviations in the price level, even more so in a context like the current one, where geopolitical uncertainty threatens their stabilization process," the union requested yesterday.

Added to the impact on employment is

inflation in the services sector

, a recent cause for concern, which is determined by an increase in demand, a shortage of labor and a significant rise in salaries. "Services represent around 50% of the Spanish inflation basket, so if services inflation remains around 4%, it would contribute 2 percentage points to the general rate," they point out from Capital Economics.

It is also influenced by the fact that

energy

is falling in price much less than it did last year, which causes a negative

'base effect'

on inflation; and the withdrawal of some measures, such as

the VAT reduction

on electricity (in March it returned to the normal rate of 21%) and the one that is planned for basic foods in the second half of the year.