Price hike 5.5%

Spain just published the advance data for CPI growth October: 5.5% YoY. Since June 2008, when it was 5%, inflation has not reached similar numbers. This number, which seems to break a psychological barrier, is far from a target 2% inflation (With flexible monitoring when noting temporary deviations) set by the European Central Bank for the eurozone in July of this year.

The problem with inflation is that it becomes entrenched in the system or it starts to speed up. When economic agents (houses and firms) begin to take inflation into account when making their decisions and try to cover their costs, price stability is lost.

disturbing personality

This figure seems to be alarming economic agents: the fear that companies will shift their increased costs to the prices of finished products, and unions asking higher altitudes salaries, pensioners who deem their pension reassessment insufficient or tenants whose rents will be updated based on this data.

The consumer price index and its growth, that is, inflation, are known to the public. And this audience notes with increasing concern its upward trend: inflation in February of this year was at 0%.

What worries the monetary authorities (who are responsible for formulating anti-inflation policies) and the government (which manages economic policy) – they say – is the inflation trend, which reflects lasting effects on the economy. In other words, inflation is here to stay. The National Institute of Statistics presents an approach to this concept through data Core inflationWhich excludes prices for energy products and raw materials (more volatile) and better reflects the state of the economic structure.

What is a file Core inflation Spanish October? First, that their values ​​are below the general value (1.4% vs. 5.5%, respectively). But also in April its value was 0%. Therefore, inflation does not show a stable path but an upward trend but still at low values.

trend analysis

The key is to assess whether the observed trends (both real and core inflation) will continue to hold in the future. For this we have to analyze three questions:

1. If the shock caused by the price hike continues for a longer period.

2. If there is a possibility that the price increase input (Resources used in production) are transferred to consumption (which will be reflected in the consumer price index for the next few months).

3. If it will be created Inflation spirals, the real mother of pregnancy.

The reason for the heights

Starting with the first question and pay attention to Movements in the markets Global energy prices, it does not appear that prices will correct their levels in the short term, given the imbalance that exists between global supply and demand. In addition, winter comes in the northern hemisphere, which is a bad time to reduce consumption.

It is necessary to take into account that if shock Energy prices are constant, companies – all, but especially those with more energy-intensive consumption – will try to shift the increase in costs into their prices.

Industrial price hike

One of the indicators of growth in consumer prices is the growth of industrial prices. If 5.5% of the CPI is worrisome, the IPRI (Industrial Price Index, also produced by the National Institute of Statistics) is even more so. that it uptrend It looks like a silhouette of Everest: in April 2020, in the midst of an epidemic, industrial prices showed a negative annual rate of -8.4%. In January of this year it reached positive values ​​with a growth of 1%, and from there it followed an upward ladder to 23.6% in September, the highest rate since 1977.

Companies face not only rising energy prices, but also transportation or other essential products of the industry, such as semiconductors, that put some production chains at risk. Therefore, the impact on costs drives inflation to wholesale markets, but will these increases be passed on to final consumers?

Well, that depends on how the request responds. How is aggregate demand at the moment? Now there is a lot of demand caused by the emerging corona virus (Covid-19) which is gathering with the return to normal life, such as home savingsThis can be accelerated if there is an expectation of future price increases as the consumer will provide spending.

In some sectors that have been hit hard by the pandemic, such as tourism, summer results It was better than expected despite the low number of foreign tourists. Although it is still far from 2019 levels, it is evidence of greater pleasure in consumption.

To request families it is necessary Add overhead, which will grow in all economies, including Spain. European funds or those planned for the US will reach speed in 2022. This also fuels the inflationary cauldron.

Inflation spirals

And last but not least, there are inflationary vortices, supply or demand, or both, like oxygen, fueling the fire of inflation.

These spirals are nothing more than an attempt by some economic agents to protect themselves from the losses caused by inflation. The increase in production costs will be transferred to the market more easily if there is no competition (for example, in services) or if demand continues: daily coffee, public or private transport, hairdresser, as well as a light bill that already seems to have a life private to him.

The fact that consumption is not reduced significantly does not mean that these increases in the cost of living do not lead to a demand for better salaries to compensate for the loss of purchasing power, improvements in pensions, greater aid, etc. These increases, if they occurred, would fuel inflation again, through wages and public spending, increased costs, etc…

Storm clouds bring inflation and a perfect storm could occur if both supply and demand lead to this process, maintaining this worrying escalation. Because, in addition, there are Inflation difference with the rest of the eurozone. Since March of this year, prices in Spain have risen above the rest, and this is nothing more than a loss of competitiveness that accumulates and affects, above all, the sectors most vulnerable to international competition. The loss that sooner or later will be transferred to the real sector of the economy: the revival of growth and employment. Great words.