The brutal loss of purchasing power of families: inflation at maximum, deposits at minimum and stagnant wages

The year of economic recovery has also been the year of the return of inflation. Prices are rising at the fastest pace in the short history of the euro zone, while in countries like Spain the CPI is at its highest since 1992. All this in an environment of minimum interest rates and virtually stagnant wages. families are facing to the ‘monster’ of inflation practically unarmed.

This combination of factors has become the great threat to the purchasing power of families, especially those who do not have the option of negotiating their salaries upwards or investing in higher-risk assets that are offering a return that at least covers the rise in prices. That is why it is customary to refer to inflation as the ‘poor man’s tax’.

Prices have been rising strongly for several months, while the reaction of wages and also that of interest rates could take a little longer (interest rates that begin to be reflected in more conservative assets such as deposits). During this course, a good part of the population faces a massive loss of purchasing power.

a harmful inflation

The CPI is growing at 5% year-on-year in the euro zone and 6.5% in Spain. Furthermore, much of this inflation is centered on certain goods whose demand/consumption is very rigid (energy), which complicates or makes impossible the search for substitute goods that make it possible to avoid this historical rise in prices.

From Allianz they point out in a new report that Spanish families are facing a complex loss of purchasing power: “The expected inflation close to 4% this year, especially high energy prices, will weigh on the real purchasing power of households” . Although they recognize that it is a European phenomenon and that it could be decisive, for example, in the next elections in France.

Contrary to what could be happening in other economies where demand (thanks to higher incomes and nominal wages that are growing strongly) is one of the main factors driving inflation, “in Europe it continues to be driven predominantly by energy and supply bottlenecks. All of this is ‘cost’ inflation with virtually no sign of ‘demand pull’. In other words, the high rate of inflation in Europe is a sign of erosion of the real income of the population and, therefore, of purchasing power, not a sign of overheating”, say the Unicredit economists in their weekly report.

Patrick Artus, an economist at Natixis, points out in a report all the threats families face on the price side to maintain purchasing power. The sharp rise in energy, both electricity and fuel, the greater problems in accessing housing in the face of rising prices, the higher cost of transport and other services that affect low incomes to a greater extent… “in Ultimately, European countries face multiple price hikes that will test purchasing power.

stagnant wages

While inflation rises, wages remain virtually stagnant. Although workers’ compensation usually lags behind the price cycle (inflation rises first and then wages at the risk of creating a loop), this time the gap is abysmal and although wages begin to pick up in 2022, expected increases (even the most optimistic) would continue to leave wages in real terms lower than those of 2020.

“Wage growth remains utterly disappointing. The growth rate of negotiated wages in the euro zone slowed to just 1.3% (year-on-year) in the third quarter, the lowest since the introduction of the euro in 1999. One of the reasons for this salary evolution is the full restoration of labor participation (the return to work of many of those who lost it during the covid) to its pre-pandemic level in Europe,” they say from Unicredit.

In the case of Spain, the wages agreed in the agreement rose by an average of 1.47% until December 2021, below what was registered in the previous month (+1.49%) and very far from the CPI whose data stood at 6.5% at the end of the year, its highest rate in 29 years. The year-on-year CPI data for December implies an average inflation for the entire year 2021 of 3.1%, more than double the salary increase agreed until December in the collective bargaining. However, if inflation remains high, as expected, and wages don’t take off, workers will lose even more purchasing power month-on-month in 2022.

As the Bank of Spain recognized in a recent report, salaries will take time to adapt to inflation if they end up doing so because most of the agreements registered in 2021 (and in previous years) do not have a salary review clause to avoid loss of purchasing power.

Specifically, of the 2,886 agreements of 2021, only 15.8% (456) had a salary guarantee clause and of them, only 354 contemplate that it be applied retroactively, according to Labor statistics. These figures clash with those of 2005, when 72% of workers had some type of safeguard to maintain the purchasing power of their salaries.

Hit the poorest families

This blow to families affects above all those whose salary bargaining power is lower, which normally tend to coincide with those with lower wages and less demanded qualities in the labor market. At the same time, as revealed by the data from the latest Financial Survey of Families by the Bank of Spain, it is the families with less net wealth that maintain a greater part of its financial assets in deposits (57% of all its financial assets) and other instruments that today are unable to offer a return even close to that of inflation.

The hundreds of billions of euros in deposits held by Spaniards lose purchasing power day by day. On average (including high and low incomes), 24.5% of the financial assets of Spaniards are precisely in deposits. These instruments offer a return of 0.01% in Spain and 0.20% in the euro zone (one-year deposits), far from covering the increase in the cost of living. Thus, the blows to purchasing power come from several fronts.

On the contrary, this same survey reveals that “for households in the highest decile of the wealth distribution, the relative weight of unlisted shares and participations, listed shares or pension plans is much greater”, while deposits only represent 12.5% ​​of all its financial assets. In addition, these households that are in the upper part of the wealth and income distribution are those that frequently own a second home or more. It is precisely stocks, funds or housing, the assets that are allowing us to better weather this wave of inflation.

The positive side that households can find is that inflation, just as it reduces real purchasing power, also reduces the actual burden of the liability, that is, of the debts. Inflation raises the price of everything, but the debts (except those with a variable rate) remain. This, in principle, is a relief for households with more debt than their assets.

However, data from the Bank of Spain reveal that households with a higher debt over their total assets are found in the income percentiles that belong to the middle and upper middle class. While the lowest percentiles accumulate a debt equivalent to 10.4% of all their assets and the highest percentiles (10% of households with the highest income) have a debt equivalent to 9.3% of all their assets . The difference in net terms is small and in any case it is the middle class the most indebted, in relative terms, with 14% debt over total assets.

For all these reasons, the property firm Bernal & Sanz Bujanda confirmed in a recent analysis that “economists always refer to inflation as the tax of the poor. This statement leads us to ask ourselves a question about the savings of Spanish households. According to data provided by the INE, household savings in the third quarter reached 3.7% of their disposable income. Spanish families saved between July and September a total of 6,547 million euros. This savings, part of which is used for bank deposits, leads our families to keep close to one billion euros in deposits. With extremely high inflation, how is it possible for bank deposits, remunerated below 1% and weighed down by taxation, to reach this record figure with the loss of purchasing power that this entails?