The IPC traffic light reveals that inflation is already a plague and that the worst is yet to come in Spain

Inflation has entered our lives like an elephant in a china shop. After years without showing signs of life, the rate of change of the CPI has reached a maximum of almost 30 years in Spain. In addition, although it is true that at first the price increase was focused exclusively on energy, now inflation has become a kind of plague or pandemic that is spreading throughout the consumer basket. Meanwhile, the producer price index (rises to historical rates), oil (remains unstoppable) and core inflation suggest that the worst could still be to come. Inflation will hit highs not seen since 1990 in February and will continue to expand by consumer basket.

To date, the year-on-year inflation peak came in December, when the CPI reached 6.5%, a maximum not seen since 1992. The January figure stood at 6.1%, which at first glance might seem like a change of trend, but the truth is that inflation has continued to expand across goods and services, while incoming data reveals that the change in trend will have to wait until at least March.

From Funcas they warn in a note that “the drop in inflation in January has been fundamentally a consequence of a downward step effect in electricity, which has more than offset the rise in core inflation. The increase in the latter has been concentrated especially in goods, and, to a lesser extent, in processed foods.

Moreover, in February inflation could resume its upward trend with a rise of one point or more in year-on-year terms. The sharp rise in oil prices has left Funcas’ previous projections out of date. Crude oil is now trading in the $95 zone, a figure that has been incorporated into the central scenario (at least until the end of March). “Under these hypotheses, the rate of inflation will rise again in February to 7.1%and the annual average will be 4.6% (compared to 3.7% in the previous forecast).” The annual average for 2021 has been 3%, according to Eurostat, so the inflation that we will have to endure this year will be on average much higher than last year.

Inflation spreads and spreads

Màxim Ventura Bolet, an economist at CaixaBank Research, explains in a note that “63% of the basket already exhibits inflation rates above 2% while 26% of the basket is already above 5%. As of February, we expect a new uptick in headline inflation as there will no longer be the base effect caused by the January 2021 electricity price hikes”.

Going to the disaggregated data offered by the INE, it is curious to see how what was initially an energy phenomenon (rise in oil, gas and electricity) now affects a very diverse range of products and services. In annual terms, pasta and couscous have become more expensive by 20%, olive oil 30.1%, hotels and lodging services 18.1% or sheep and goat meat 12.6%. However, it is still energy that contributes the most with increases of more than 30%.

Ventura Bolet recognizes that “The contagion trend of recent months continues”. Updating the data, already 63% of the consumer basket shows inflation rates equal to or greater than 2% (compared to 55% last month and 30% in September). 37% of the consumer basket shows inflation rates between 2% and 5% (compared to 32% last month and 18% in September) while 26% of the consumer basket already shows inflation rates greater than 5% (compared to 23% last month and 12% in September).

Going back even further in time, in January 2017, 92.4% of the basket showed inflation rates below 2%, while only 7.6% had inflation above 2%. The turn of inflation after the pandemic it is more than notable and is increasingly reaching a greater number of goods and services that are very important in the typical Spanish consumer basket.

Why does this happen?

This is a phenomenon that affects practically all of Europe and, of course, the US, where inflation is even more widespread than in Spain and the euro zone. The first stones of this inflationary phenomenon were laid at the beginning of 2020, when the covid pandemic forced economies to close, destroying companies’ sales forecasts and paralyzing their investment (both replacement and obviously new capacity).

At first, with the lockdowns, demand fell even more than supply, leading to a brief deflationary period. However, historic public stimuli, the improvement in the health situation and the reopening of the economies restored strength to demand almost overnight, taking supply off balance (it had frozen its investments).

accumulated savings and low interest rates they have led to an imbalance that was first apparent in energy and chips, but has spread to many other goods later. In addition, this first wave that hit energy above all is the one that is now spreading to the rest of the basket, turning a transitory inflation into a somewhat more lasting inflation. Energy is not only more expensive for homes, it is also more expensive for factories or freight transport. The last limit is salaries. If inflation translates into notable and lasting wage increases, then the phenomenon will be considered permanent.

“The global political response of fiscal and monetary stimulus during covid is unprecedented, both in terms of speed and scale…Although there are many reasons to think that high inflation is temporary…fiscal stimulus and the degree of monetary accommodation may have brought into play broader-based demand-driven inflation,” say economists at the Institute International Finance (IIF).

For example, the rise in US inflation is so broad based (it has reached so many goods and services) that it is unparalleled in recent history, according to these experts. “Although this is not a definitive way to calculate how persistent high inflation will be, it does favor the theory that this is broad demand-driven inflation. To our surprise, despite the high negative output gaps in the Eurozone, inflation is also very generalized, led by overheating in Germany”, conclude the IIF experts.