Inflation has become one of the most notable concerns for families, businesses, and central banks. After years of stagnation in prices, the CPI is showing variation rates not seen in decades in the euro zone. But as is customary in the short history of the Eurozone, the divergences between countries are once again more than notable.
On this occasion, the divergence arises between two countries whose economies (and history) tend to move in a similar way, which makes it even more striking. While in Spain inflation stood at 5.4 and 5.6% in October and November respectively, in Portugal prices have risen by only 1.8 and 2.7% in the same months. Two economies that have followed relatively similar paths are now presenting a decoupling of prices mainly due to the different impact of higher energy prices (especially electricity) in each economy.
Beyond the loss of purchasing power that it can mean for Spanish families, a much more intense (and volatile) rise in prices in Spain than in Portugal can also generate a competitiveness problem for national companies they have to deal with higher costs, which threaten to reduce the attractiveness of Spanish goods and services in international markets.
Why is this difference between Spain and Portugal? Disaggregating the components that make up the CPI, it can be seen that almost all the difference is found in the energy component (electricity, gasoline, diesel …). The latest data disaggregated by contribution to the CPI are those of October. In Spain the interannual CPI was 5.4%. Of these 5.4 points, 4,155 corresponded to energy, 0.635 to services, 0.415 to food, alcohol and tobacco, and 0.213 to non-energy industrial goods. The latter range from clothing, footwear, books, to cars, furniture or household appliances.
In Portugal inflation is 1.8% and is broken down as follows: 1,082 points came from energy0.557 for services, 0.157 for food, alcohol and tobacco, and 0.0784 for non-energy goods. More than three points of the difference between Portuguese and Spanish inflation come from energy, a component that is supposedly largely dependent on international markets (gas, oil …).
The latest data from Eurostat (Brussels statistical agency) are revealing. While electricity has risen 62.8% year-on-year in Spain in October, Portugal did it only by 2.8% (in the euro zone around 16%). The difference is partly because in Spain electricity was unusually cheap for much of 2020 and the rise that today affects all of Europe is also affecting Spain more acutely. The notable price boom plus a significant base effect (when comparing data with 2020). The key is in the volatility of electricity prices in Spain.
Tiago Belejo Correia, economist at CaixaBank Research, has published an analytical article in which he explains a good part of this difference: “The rise in energy prices is having its greatest exponent in electricity. In the Iberian electricity market, the MIBEL, the average price between July and September was 122.8 EUR / MWh, which contrasts with the 39.6 EUR / MWh registered on average in 2020. This trend of marked rise continued in October. Several reasons underlie this increase in cost, among which the increase in the price of CO2 emission rights and natural gas (fuel used in combined cycle plants) stands out. Generating one MWh of electricity in a gas plant requires between 1.7 and 2, 0 MWh of natural gas and emits 0.4 tons of CO2 “, explains the expert.
If the difference in the Iberian market is being just as important for Spain and Portugal, why are the Portuguese people paying much less for their electricity? “Although most of the Portuguese consumers are in the liberalized market, the fact that the transit to the regulated market can be carried out without limitations together with the maintenance of the regulated market rates reduces volatility and acts as a reference for the market price. liberalized “, says the CaixaBank Research expert.
In addition, this expert highlights that in Portugal a good part of the price is controlled by the state Through the Energy Services Regulatory Entity (ERSE), which establishes a fixed price during the year, although it can be revised in the middle of the year if the forecasts do not comply with those of the regulator, but these modifications are slow and occur at the long of the time.
Although we share the electricity market, in Portugal the setting of the electricity price occurs before the wholesale market changes, in Spain it occurs afterwards and almost in real time, which generates strong fluctuations in the prices that led us to pay in 2020 very little and in 2021 much more. When making the difference rate in Spain we are paying 60%, the most expensive electricity in Europe. In Portugal, however, it remains at levels similar to those of 2020, but then the neighboring country paid one of the most expensive prices.
The ERSE establishes the price of electricity on an annual basis. On the contrary, in our system the price is calculated every day according to the movements of the wholesale market. Probably, if an average is made of what the Portuguese and Spanish pay over five years, the amount is similar, the difference is that in Portugal it is paid for several years in a stable way and in Spain we are at the mercy of the movements of the market.
The renewable tax
On the other hand, about 40% of the Portuguese energy bill (without taxes) is related to the extra cost component of production under the special regime (electricity production through solar, wind, biomass energy). This is an extra cost associated with the purchase of renewable energy (which has a guaranteed rate, usually higher than the sale prices in the wholesale market). However, now the price on the wholesale market far exceeds the guaranteed rate for renewables.
Belejo Correia explains that under normal circumstances (with lower prices in the wholesale market) the market price in the MIBEL is below 90 EUR / MWh and consumers paid the differential. However, now the opposite is happening, which has cushioned for the consumer the rise in prices that occurs in the wholesale market. ” has been described as an electrical ‘miracle’ of Portugal it should not be qualified as such. The Portuguese have been paying today’s raise for years and will pay it off little by little in the future.
The impact of gasoline
On the other hand, another factor that is influencing the difference in the total energy bill is gasoline and diesel. But here the key is similar to what happens with electricity. Portugal has considerably higher excise duties on both types of fuel (hence the Portuguese who live near the border come to Spain to refuel). These taxes are not a percentage of the final price (as is the case with VAT), but they represent a fixed amount for each liter. The final price of each liter is made up of more than 64% by taxes, so the rise in the price of oil does not influence the final price of gasoline and diesel as much, reducing the impact on inflation of this component. While in Spain fuels have risen by around 30% year-on-year, in Portugal they have risen by 20%.
Finally, the relatively higher rise in electricity and fuels in Spain it is beginning to be transferred to the rest of goods and services. Production costs for companies soar (a higher electricity bill, more transport costs …), which in the end ends up permeating the price of the final goods and services that are sold and produced in Spain. In Portugal this cost boom is being lower.
All of the above can be seen clearly reflected in producer prices (PPI) of both countries: in Portugal the PPI has risen 15%, while in Spain it has shot above 31%. Costs are skyrocketing for Spanish companies (which have to deal with much more volatile prices, which hinders planning), which can create a competitiveness problem, especially if Portuguese firms produce similar goods and services (substitutes ) to those of the Spanish women.
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