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Where will inflation be in 2024… and nuclear generation half in 2030?

Date: July 17, 2024 Time: 15:45:03

My favorite topic lately is inflation, but above all, understanding its causes and looking for the data that allows us to understand what is happening and what may happen in the coming months and in 2024. I am also very interested in energy, but I see that the authorities are planning or they indicate that they plan until 2030, but if we are not able to know what inflation will do in 2024, and that with the best technicians in the world, to which we add the members of the governing councils of the independent central banks of the world, how is it It is possible that we will finalize an energy vision for 2030, in which, among other things, a structural change is generated in seven years in a sector in which “seven years are nothing”.

But let us stay today with the analysis on inflation and explain why we do not agree with the ECB’s vision that, in those sectors where energy does not directly weigh much in the cost structure, it is observed that inflation does not moderate and This is because it is underlying and interest rates need to rise because if not, it will not moderate. This is applicable to the industrial goods and services sectors. To simplify the understanding of my argument, I am going to comment on the analysis of the clothing and footwear sector in Spain, although something similar occurs in tourism, but it is more difficult to visualize with just a few lines.

My argument is that energy prices influence many costs indirectly and that many sectors during the rise in the prices of energy and agricultural products cannot transmit this rise completely and, therefore, will take longer to lower prices because the indirect costs derived from energy go with the lag of the transmission of costs in the production chain. This delay does not mean that they will not go down and probably just as fast, but it is so visible in low energy intensive sectors where prices are falling later than in energy intensive sectors, that a logical leap is derived from saying no they are going down The first is that they went up later and the second is that they are already going down.

This reduction in inflation, even in these sectors, could be jeopardized or halted if decisions to raise interest rates are more or less announced in the euro zone. Does it surprise you? Well it shouldn’t. This is a key channel of monetary policy. The sharp rise in interest rates will lead companies, and in general to all, to higher financial costs that will require more unit margin per unit sold to offset this increase in financial costs. This is why I think interest rates should no longer be raised, because they may even delay the fall in inflation. Likewise, this argument leads me not to understand that it is possible that there are very high unit margins and not that they are simply recovering in a large part of the sectors, and that more margin is going to be needed to pay more expensive debt.

Let’s go to the data. According to the CPI, clothing and footwear prices showed growth of around 1% until the end of 2021, from which time price variations have shown strong volatility. Cumulatively, between April 2021 and May 2023, the prices of clothing and footwear increased by 6%.

The main inputs or costs in 2019 in the production of clothing and footwear are textile products (artificial and synthetic fibers 26.7%, personnel costs 22.6%, leather and footwear articles 11.6%, and clothing 5.4%) . Services for the production, transmission and distribution of electrical energy only accounted for a weight of 1.3% of the total.

Thus, the clothing and footwear sector is classified as low energy intensity. But this is not exactly the case, because energy is indirectly reflected in the main cost component, that is, textile products that have risen 27% since April 2021. The price of textile fibers takes longer to fall than the energy. The synthetic fibers contain a lot of petroleum and in general they are all intensive in energy and the natural ones (Ukrainian cotton) in fertilizers. All this chain takes time to go up and down. But it is also that in this sector the entire rise in costs, which was 10%, was not transmitted to its sales prices, since the accumulated CPI for clothing and footwear in the same period was 6%.

In simple numbers: the 10% rise in costs is explained by 4.6 percentage points for artificial and natural fibers, which rise due to the increase in oil in 2022 and cotton, but take time to reach the end of the chain . Another percentage point is explained by the rise in electricity and almost another point by chemical products also linked to energy. Conclusion, in a sector that is not directly energy-intensive, its electricity costs in 2019 were only 1.3% of the total cost increase, 66% of which is indirectly due to energy. We are talking about a sector that makes up the so-called underlying that is nothing more than a sector that evolves with ‘lags’ (delays) to the prices of raw materials (textile fibers).

The increases in costs in the sector during the period from April 2021 to May 2023 are explained by highly energy-intensive intermediate consumption and by energy directly. The fall in prices in the sector will be followed by the drop in the price of raw materials, but just as it was transmitted with a lag: first energy, then artificial fibers, now there is this same lag, on which the rise in interest rates what it does is delay the drop in prices because higher financial costs require a higher unit margin to avoid bankruptcy. Of course, the first thing we will see in this semester are good accounts for the sector due to falling costs and because they have not yet renewed their debt, but let’s look at those of 2022, they were surely not so good.

80% and that this corrects inflation by itself, if there is competition, which in most of the goods that we call tradables is international competition. Raising interest rates more only leads sectors like this to need higher unit margins to pay the higher cost of debt and to try to get more margin to pay it. Regarding costs, I am amused by a phrase that summarizes what happens to us when we talk about CPI for energy and underlyings and we do not realize that not everything is as they paint it. A phrase to visualize this idea, which is used in a completely different context: “Neither are they all that are (analyzed costs) nor are they all that are.”

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Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.

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