Inflation in Spain is at its highest level since 1985. In June, the annual consumer price index (CPI) was 10.2%. Experts estimate that it will remain above 10% in July and August but will decline from September.
This is due to the so-called “step effect”, which occurs when prices have risen sharply in a certain period and the fluctuations abate sharply one year after that sharp rise. In Spain, this moment occurred from September 2021, when the escalation of electricity prices started. Therefore, the step effect will occur ayear later, after the summer. Apart from the step effect, the recent 0.5 percentage point increase in interest rates decided by the European Central Bank will also contribute to this slowdown in inflation.
The analysis team of the Spanish non-profit organisation Funcas expects inflation to fall to around 8% in December and to break the 4% barrier in June 2023. In other words, inflation will be halved in just six months. Researches by the bank BBVA expect the average CPI for this year to be 8% and to fall to 3% in 2023
Most experts expect interest rates to rise again before the end of the year, further increasing the financial burden on households and thus reducing the resources available for consumption. And the less consumption, the less pressure on the CPI.
Pressure on households
The bad news is that this slowdown in inflation is unlikely to lead to a reduction in the price level of most items in the shopping basket.
The consumer price index CPI measures the change in prices, but not the price level. If prices that are currently rising by 10% rise by only 3% next year, this will not mean that prices are falling. It will only mean a slowing down of the increase.
If we translate this into price levels, it can be better understood. Something that cost €20.00 in June 2021 and has risen by 10% from then will now cost €22.00. And even if the CPI falls to 3% in June 2023, it will cost even more: €22.40.
Official statistics do not publish concrete data on price levels, but they do provide data on the unit value of food. This is not the same as the price, but is the estimated value of one unit of each product. It is obtained by dividing the total expenditure on each item in euros by the total quantity of the item consumed (in kilograms, litres, etc.).
Between 2019 and 2021, the unit value of a total of 28 food groups increased by 10% or more. The largest increase, of 33.3%, occurred in tea and herbal teas, followed by strawberries, raspberries and grapes, mutton and goat meat and coffee, with increases of more than 20%.
The price of dried, smoked or salted fish and seafood, snacks, citrus fruits, stone fruits and isotonic drinks rose by over 15%. To clarify, the unit value of a kilo of olives increased from €6.50 in 2019 to €7.40 in 2021. That of frozen fish from €9.40 to €10.50 and cheese from €9.90 to €11.00.
Will wages go up?
Many experts believe that raising wages in line with inflation could also have a negative effect. On the one hand, it would improve the financial situation of households. On the other hand, it would encourage consumption and put further upward pressure on prices.
Even if inflation declines after the summer, the price levels that households will have to bear will continue their upward trend until at least the middle of next year.
Households can absorb these cost overruns by reducing their savings or finding new sources of income.
Also read: Inflation never been so high since 1985