Inflation drops to annual low of 5.8% but food continues to rise

Inflation drops to annual low of 5.8% but food continues to rise

Electricity and fuel prices are falling, and most foods in the shopping cart continue to soar. Pockets of Spaniards know this reality better than anyone, to which concrete data has now been provided by the latest Consumer Price Index (CPI) published by the INE.

Inflation for December will close at 5.8%. This is one point below what was marked in November (6.8%), and the lowest data of all of 2022. They are five points lower than the maximum recorded in July, not less than 10.8%.

Corporate repo and markups drive up prices, experts say

“The reading must be very positive. Inflation has fallen by five points in five months, mainly due to the fall in energy prices,” explained the First Vice-President and Minister of Economy, Nadia Calviño, as soon as the data was published. The measures taken by the government to contain energy prices have borne fruit, to which has also been added a cooling of international energy markets. “The data is good, of course, because it is used to index many economic references, rents, other income, contracts, salaries, etc.,” explains José Ignacio Conde-Ruiz, Fedea economist.

But solving the Spaniards’ pocket problems couldn’t be so easy. The soft data for general inflation is accompanied by the bitter scenario presented by underlying inflation (which does not take into account energy or unprocessed food prices), which ends the year at 6.9 %, after increasing by only six tenths last month. The guilty ? Especially processed foods, which are accumulating the biggest increase in decades, with a year-on-year increase in November (latest data available) of 15.3%.

A “logical” trend, according to the Minister of the Economy, and which “will start to change from January”. His opinion is only partially shared by analysts, for whom the fact that it is “logical” is not a reason for peace of mind, but on the contrary, it generates a lot of concern. “It is very difficult for food to come down in price now. Not even with the reduction in VAT that the government has approved. A liter of milk which today costs one euro should go down to 96 cents, how much do you think that “It will stay at this price? In such small quantities, it tends to round up. Also, many producers have been losing money for too long to lower prices now,” warns economist and IEB professor Javier Niederleytner .

Economists call for income pact to contain rising inflation

The CPI is calculated on the basis of a basket of products in which energy and unprocessed foods have a large influence. When they increase, the overall index increases rapidly. When they fall, headline inflation also falls. “There are few components but they are very volatile because they are very sensitive to the international situation. Now that the impact of the war has subsided, China’s covid policy and supply chain issues are resolved, headline inflation is falling rapidly. With the rest of the basket items with which the CPI is calculated (those that include underlying inflation), price translation is slower,” says economist José Antonio Herce, founding partner of LoRIS (Longevity & Retirement Income Solutions).

The rest of the goods, hundreds, are used to calculate underlying inflation, which is more stable and better reflects the reality of the country. Here’s the problem. Underlying inflation has exceeded the title. This is something that has happened on different occasions, the last in 2020, but the current reasons warn of bigger issues. “Rising energy is quickly infecting the hundreds of assets the underlying is calculated with, but now it has taken on a life of its own. The logic of the rises has nothing to do with energy and that is why it will take months to get back down,” says Herce.

“They will tend to converge. The abolition of the aid of 20 centimes for fuel will raise the general index in January by around six points and the reduction in VAT will be barely perceptible. We can expect a convergence of the two around 4.5% in the middle of the year. But for that, an income pact is urgently needed, not only to contain wages, the government must also create an observatory of corporate margins, ”says Conde-Ruiz for his part.

Core inflation stands at 6.9% in December and exceeds headline inflation for the first time since 2020

Because this “own life” of which Hercé speaks is due to the fact that the current rise has nothing to do, as economics textbooks claim, with second-round effects (wage increases that drive up costs and start again). . “On this occasion, the unions are playing a laudable containment role. The salary increases they are asking for are far from the level of the CPI. The same is true for the self-employed and SMEs, which are subject to strong margin containment, or even losses, so as not to transfer all their costs to the end customer,” explains Herce.

Where is the danger then? “Pensions and large oligopolies, which increase their margins for lack of competition”, explains the economist. In the same vein, points Conde Ruiz, who calls for an observatory of corporate margins. “Increasing pensions or salaries of civil servants by 8% is not reasonable in this economic environment. The rental agreement should also include them to stop overbidding,” he adds. A proposal difficult to predict in an election year like 2023.

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