The CPI falls but inflation is entrenched, by Editorial

The CPI falls but inflation is entrenched, by Editorial

underlying inflation. That’s the problem. The attention of all economic analysts and the Government itself is focused on this index that measures the evolution of prices without accounting for fuel or fresh food, which are the most volatile elements of the general consumer price index (CPI). This means that inflation has surpassed the first impact of the Ukraine war, which occurred in energy and grain, and has become entrenched in the non-perishable food, goods and services mix of the economy.

The paradox arises that in 2022, at the end of December, the general CPI was even lower than core inflation itself. The –temporary– decline in energy prices caused the general CPI to fall to 5.7% while the underlying rate rose to 7%. This is a historically unprecedented event. In Spain, moreover, there is the curious fact that it has the lowest general CPI in all of Europe and, on the other hand, registers the highest underlying rate.

Rising food and underlying price rate is the problem

Fighting inflation when the underlying rate is high, as it is across Europe, is extremely difficult, as it requires bringing down prices throughout the economy. For this, the only solution that the European Central Bank (ECB) has is to persist in increasing interest rates and restricting credit to weaken demand to the point that producers, companies and traders are forced to lower prices. to be able to sell and place their products and services among their clients and consumers in general. This is a process that can lead to recession and has very painful costs for employment until the goal of beating inflation is achieved. But neither the euro zone nor any other economy can afford to live with high inflation for long, as this destroys the foundations of well-being.

The most optimistic economic observers are confident that the progressive decline in the headline CPI will pass through to core inflation in the coming months. Forecasts suggest that, in any case, inflation will not fall below 3.5% in the next two years.

The increase in food prices is very worrying, which in one year has risen by an average of 15.7%. The most notable increases, due to very specific problems in each case, have been those of sugar, which has risen by 50%, oils and fats (38.1%), milk (37.2%), eggs (29.8%) and cereals and derivatives (22%). All these products have a direct impact, to a greater or lesser extent, on the group of processed food products, which explains the increase in inflation, both general and subjacent, and reflects the difficulty in reducing it.

The second vice president of the Government and Minister of Labor, Yolanda Díaz, has blamed businessmen for the increase in their profit margins for the high inflation. She, but she has done it without having presented any study
to certify that this may be the cause. Everything indicates, contrary to what Vice President Díaz says, that the increase in energy costs, especially electricity, labor costs and credit -due to the rise in interest rates-, have an impact on the reduction of the business margins, especially in the case of small and medium-sized companies.

The most positive factor in the current economic situation is the maintenance and creation of employment, which is also the best social policy that can be done at this time to help families overcome the impact of the sharp rise in inflation, with independence of aid to the most vulnerable groups. For this reason, among the main concerns of the Government should be contributing to the survival of companies with a general policy of reducing their costs, which in turn would help to lower prices. The battle against inflation, in any case, will be long and hard.

Read Original Source Here…

Scroll to Top