Prices stopped their positive streak in January, with a slight acceleration in inflation to 5.8% compared to the same month of the previous year, according to advance data published this Monday by the National Institute of Statistics (INE). It is one tenth more than that recorded in December. The change of year therefore represents a slight change in the trend that began in July, when the peak was reached. Since then, inflation has accumulated five months of deceleration, and has left five points on the road compared to the maximum of almost four decades that it touched in summer. The worst seems thus to have been definitively left behind. However, the return to more normal inflation rates is showing signs of fatigue, and core inflation, which excludes energy and fresh food prices, continues to climb: in January it stood at 7.5% (five tenths more), although government sources expect it to peak “in the first quarter”.
January is proving to be a particularly difficult month to analyze for experts who make forecasts, due to the many conflicting forces pulling prices in one direction and in the opposite. On the tax side, the Government abolished the 20 cents discount per liter of fuel for private drivers, which has been decisive for inflation to grow again, but in exchange it eliminated until June the super-reduced 4% VAT that was paid for basic foods such as bread, milk, cheese or eggs, and lowered that of pasta and oils from 10% to 5%, a bonus that has partially offset the rise in fuel prices.
The figures of to what extent this measure has contributed to stopping the escalation of food, which has been increasing in double-digit prices for nine months, will be known in just over two weeks, when the INE publishes a more detailed breakdown. According to the calculations of Rafael Salas, professor of Economics attached to the Complutense Institute of Economic Analysis, the discount on groceries has been able to reduce inflation between two and four tenths, while the end of the fuel bonus increased it between six and seven tenths.
The dichotomy can also be seen in the evolution of energy prices: electricity rates have fallen sharply thanks to the rains that have boosted hydroelectric power, the wind that has pushed wind power, and the mild temperatures that have reduced demand of gas, taking it to levels at the beginning of 2021, but what is paid at the pumps for fuel has increased, not only due to the end of the 20-cent aid, but also due to the dynamics of gasoline and diesel. This month, the INE has also consummated a methodological change, for the prices of electricity and gas, by incorporating consumers from the free market.
As for the labor markets, they are resisting strongly both in Spain -279,000 more employed in 2022- and in the euro zone -unemployment is at a record low of 6.5%-, which favors greater consumption. But wages do not keep pace with inflation, thus preventing the dreaded second-round effects from materializing in the form of a vicious cycle of wages and prices.
In the international context, the overlap of advantages and disadvantages is much more acute. In favor of lower inflation, issues such as the recovery of the euro against the dollar in the foreign exchange market play —the price of gas and oil is denominated in the greenback, so it is cheaper if the euro strengthens, and now is at a nine-month high—, the collapse in freight rates that has made maritime transport much cheaper, and the Chinese real estate crisis, which reduces the demand for materials such as steel, iron and aluminum, and with it its price in global markets.
On the contrary, the reopening of the Asian giant’s economy should, on paper, accelerate the demand for oil, putting pressure on its price. Something against which the rate hikes by the European Central Bank to cool demand are not effective, as explained by Ignacio de la Torre, chief economist at Arcano Research. “As much as you raise rates, you are not going to open more oil wells,” he gives as an example.
One factor that has stopped being positive in January is the base effect. In that month, year-on-year inflation was lower than in December last year, which makes it more difficult for inflation to moderate. De la Torre explains this statistical phenomenon in this way. “If water goes from being worth one euro to being worth two, inflation is 100%. If the following year it remains at two euros, inflation is 0%”.
Although inflation remains practically stable in January, it is still far from normal. Spain has the lowest rate in the EU, but adds 21 months above the 2% target of the European Central Bank. And there are no signs that it will return to those levels this year: forecasts by CaixaBank Research experts estimate average inflation of 4.2% in 2023 and 2.6% in 2024. In its analysis, the entity points out rise in groceries as the main culprit. “Although the moderation in energy prices works by putting downward pressure on general inflation, the greater persistence of high inflation in non-energy components, particularly food, will keep inflation at high levels during 2023,” holds.
THE COUNTRY of the morning
Wake up with the analysis of the day by Berna González Harbor
RECEIVE IT
