In recent times, the international supply crisis is showing signs of abating, removing the worst omens for next winter. Commodity markets, the main factor in the current outbreak of inflation, have registered widespread price falls. The World Bank’s synthetic index of energy prices has fallen 11% since spring (with data for October versus April-June). The same source points to a fall in the price of agricultural products (-12% during the same period), fertilizers (-8%) and metals and minerals (-13%). A similar trend is observed in the costs of international transport and electronic components.
The lowering of supplies is providing a balloon of oxygen to our productive fabric and to the pockets of families. It is already reflected in industry, which is the link most exposed to the supply crisis: the non-energy industrial price index has barely grown by 0.9% since June, seven times less than during the months after the invasion of Ukraine .
The cost of living also benefits from the slowdown in the commodity markets and the Iberian exception. The electricity, gas and fuel components of the index have become cheaper since the summer, when they directly explained more than half of the increase in the CPI registered up to then (the total impact is still higher, taking into account indirect effects on the productive chain, especially the food chain, highly dependent on transport and fertilizers).
It is advisable, however, to analyze the de-escalation with caution, because it may be due to the slowdown in global demand —and not only to an increase in supply by the producing countries. The question is decisive, since, in the absence of a strong response from the production of raw materials, especially energy, sooner or later the economy will face phenomena of scarcity that will inexorably result in higher prices and lower growth of the exercise. The World Bank forecasts sustained pressure on natural resource prices over the next few years. So, despite recent declines, energy would still be 72% more expensive in 2023 than before the pandemic, and non-energy commodities 39%.
On the other hand, inflation continues to spread through the productive fabric. Although the much-feared second-round effects are tenuous on the salary side, margins are increasing in average terms. This could give rise to cascading effects, especially at the beginning of the year when sales rates for the rest of the year are set in some sectors.
In any case, underlying inflation (excluding fresh food and energy) remains at high levels with no clear signs of a decline so far. In addition, the inflationary outbreak has amplified: half of the prices that make up the CPI are growing at a rate of more than 6%, and only one in five does so below the ECB’s target of 2%.
All in all, imported inflation and energy costs are taking a temporary breather that will undoubtedly be seen in the CPI data for the coming months. But the de-escalation of domestic prices, that is, of underlying inflation, will be much slower. Therefore, the ECB is likely to remain vigilant for a long time, proceeding with at least two additional rounds of interest rate hikes. We will see how the economy reacts to the adjustment. At the moment, the forecasts of the main international organizations point to a relatively manageable impact and concentrated in time. Looking beyond, the maintenance of high prices, in addition to being volatile, leads us to important changes in the production model.
The industrial price index (IPRI) reduced its interannual growth in October to 26.1%, from 35.6% the previous month, thanks to the drop in energy prices and the moderation of non-energy prices. This means that inflationary pressures are relaxing in the initial phases of the production chain, as a consequence of the fall in the prices of raw materials and the easing of bottlenecks. The trend will still take time to be transferred to the rates of finished products and the CPI.
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