Prices began an upward spiral in February 2021, initially driven by restrictions and bottlenecks in value chains, both as a result of restrictions in industries and on all seaports due to Covid, as well as the strong growth in demand given the recovery in consumption and the need to replace inventories that were at a minimum. This situation was recently complicated by the Russian invasion of the Ukraine, which affected the prices of agricultural products and fertilizers, and later gas and electricity. All these elements causing the increase in price indices have moderated, or rather, they have been strongly corrected. This should lead to a reduction in inflation. Normally, in less than 12 months, the supply restrictions such as chips, the drop in the price of gas and electricity, and the drop in the price of fertilizers should be transferred to lower price drops in consumer products. and of cereals.
In this context, there is a lot of talk about Spain doing very well because it has the lowest inflation in the Eurozone, but this is not the case when you look closely. Although the case of year-on-year inflation in countries like Germany is much higher than in Spain, it is not the same if we calculate it from February 2021, when inflationary pressures began around the world. Let us not forget that controlling inflation is a medium-term objective and that cumulative or average inflation in the last two years is a better indicator of inflationary pressures. The cumulative increase in January from the beginning of 2021 to 2023 is the same, 13%, in Spain, Germany and also in the euro zone as a whole, where Italy is clearly defined above with 16.5% and France below with 11%.
The only variation has been the translation speed of the shocks, which has been slower in Germany than in Spain. Thus, since February 2021 in Europe there are differences in the speed with which shocks are transmitted to inflation: let us think of regulated prices and the speed of transmission to them of the international price shock; Or we think of electricity in Spain, where the PVPC (sale price to small consumers) was the measure used in the CPI, a rabid market measure that skyrockets with the rise in the price of natural gas in Europe. In other countries, electricity prices only changed once a year, so the transmission to the CPI was and is slower. That is why we cannot say that accumulated inflation in Spain is much lower than in other countries: it is the same alone that it has been more volatile.
We cannot boast that we are doing better in Spain, but we can say that inflation is falling in all countries and that where it rose faster, -Spain- it is falling faster. It is also a subject of presentation or narratives and other issues that he analyzed in the case of Spain. Thus, if we say that year-on-year inflation rose from 5.7% in December to 5.9% in January, we are saying that inflation increased, but this does not mean that inflation is not falling, since it has moderated by two tenths since December to January, what happens is that this month-on-month moderation was less than that of the same period a year ago.
On the other hand, if we look at other measures, inflation is falling rapidly. Thus, if we take the sum of month-on-month inflation since August, inflation is practically not growing in Spain. Of the last 6 months (Aug-Jan) the average monthly rate would be 0.05%, which raised to annual would only be 0.6%. In other words, all the past inflation that we see today in the interannual rate, or almost, is explained by what happened in the first six months of 2022, with intermonthly rates of 3% in March and 1.9% in June, which are water and that Statistically it is very unlikely that they will be repeated because it was due to the invasion of Ukraine, and the subsequent total cut off of natural gas supply by the Nord Stream submarine pipeline. Therefore, except for ‘black swans’, inflation will moderate substantially from March onwards.
C.I.P. To highlight the one that has the greatest effect because if year-on-year inflation had not been carried out, it had dropped five tenths to 5.2% in January 2023, compared to the official figure of 5.9%, which is the measurement of the CPI for electricity . The pressure from the Ministry of Economy on the INE to introduce the prices of electricity from private contracts (40% of the total compared to 60% that consumers linked to the PVPC suppose, since the latter followed the evolution of the wholesale price that did not stop go up), it has become that, in January 2023, when also taking into account the free contracts that have not decreased at all from December to January, the variation of the month-on-month CPI for electricity has been -17.45% compared to a drop in the 36.1% of the PVPC that should be used. This would be, as I say, 7 tenths less than inflation.
It is clear that the fear that the PVPC would continue to rise led to this methodological change, which, if necessary, could have been expected, because as the INE says in its methodological note, “with the aim of avoiding a bias in the annual rates due to having stabilized the evolution of prices in the previous year and in the year of introduction of the new source, the bias in the measurement being more important the greater the price fluctuations”, and if there was a year of fluctuations in electricity prices, this has been 2022.
Lastly, the weight or weighting of electricity in the CPI has also been reduced because priority is now given to determine the weight of consumer spending, according to the 2021 national accounting compared to the family budget survey that indicates a greater weight . Well, this has also prevented inflation from falling any further, because it could have ended up at only 5% year-on-year. It is clear that good haste is not a good idea to touch the CPI, and even less if it is due to political pressure, which is not I say that is the case.. although it seems so.