MADRID – Continuing supply problems and the rise in fuel prices have, among other things, caused inflation in Spain to rise to 5.6%. The debate about the loss of purchasing power of Spanish households is thus becoming even more acute.
Inflation is the percentage change in the consumer price index (average price index of a package of goods and services) compared to the same period in the previous year. The current inflation rate of 5.6% is the highest since September 1992, almost thirty years ago.
This is apparent from data published by the INE statistics agency last Monday. Since March this year, inflation has been rising continuously on a monthly basis. The INE mentions the slight drop in electricity prices as the only bright spot among the current developments driving inflation.
Loss of purchasing power
Inflation figures give rise to concerns about the loss of purchasing power of current salaries and the further economic recovery. Part of Spanish household savings that would have been consumed is now being used to offset the rise in the price of basic necessities. So-called core inflation, ie inflation that excludes food and electricity, has also risen from 1.4% to 1.7%.
Inflation is therefore a much discussed topic in the economic debate. Financial institutions keep repeating that inflation is transitory, but that message is becoming less and less valued. Highly indebted countries such as Spain now fear that the ever-rising inflation will cause monetary stimulus to be withdrawn (interest rate instrument and purchase program of the European bank and the countries’ central banks). As a result, market interest rates will rise and the number of lending will fall. Investors are already speculating about the impact future interest rate hikes will have on the stock market, currencies, and commodities.
Employees will also increasingly demand that their wages be adjusted to the new reality. This has already been shown in the days-long strike by the metal workers in the province of Cádiz, which involved thousands of workers and in which several riots broke out.
Increased inflation is not only a problem in Spain, but worldwide. Inflation also rose to unprecedented levels in economic powers such as the United States (6.2%) and Germany (5.2%). In Germany, even since the fall of the Berlin Wall, it has never been that high.
The large percentage increase in Spain is also an effect of the unusually low inflation from a year ago. In November 2020 it was even -0.8%, making the difference with November this year exceptionally large.
However, the European Central Bank (ECB) does not attribute the current rise to this phenomenon alone. However, ECB executive Isabel Schnabel has indicated that inflation in the eurozone is likely to peak in November. It therefore considers it too early to raise interest rates now (withdrawal of monetary stimulus). According to Schnabel, inflation will decrease to 2% by 2022, which is the ECB’s target. As long as this forecast holds, premature cessation of monetary stimulus will only harm employment and will not lead to a decline in the consumer price index.
Structural factors that stand in the way of a reversal of the price increase are still strongly present in Spain: unemployment is high, salaries are not rising and the aging population is continuing unabated. Aging is driving inflation because the labor force is stagnating or even declining and this is not compensated by growth in labour productivity.