MADRID – Latest data reveals that Spain’s inflation rate surged to 2.6% in August, exceeding the European Central Bank’s (ECB) 2% target. This hike follows a temporary dip below 2% in June and marks the first increase.
Part of this development can be attributed to ‘base effects,’ comparing current inflation rates with last year’s lower energy prices. Gregorio Izquierdo, Director of the Institute of Economic Studies (IEE), anticipates that rising costs and energy prices will likely cause a temporary spike in inflation in the coming months.
Outlook Through 2024
Various economic studies suggest that inflation is likely to remain above the ECB’s target until the end of 2024. However, according to Izquierdo, the recently tightened monetary policy will stabilize prices by that time.
Year-End Projections
Miguel Cardoso, Chief Economist at BBVA Research for Spain, points out the current surge in fuel prices in VozPopuli and predicts year-end inflation to exceed 4%. The Savings Banks Foundation (Funcas) even forecasts a year-end rate of 5%.
Comparison with the EU
Data from the second half of 2022 shows that, despite experiencing higher inflation than the EU average earlier this year, Spain now fares better. This is credited to a reduced dependency on Russian gas and diversified energy suppliers. Nonetheless, Pablo Hernández de Cos, the Governor of the Bank of Spain, indicates that both Spain and the EU may have similar inflation rates by year-end.
Economic Impact
High inflation could temporarily reduce purchasing power and also impact the service sector. By 2024, convergence to the 2% target is expected to be gradual. Especially if there is no downward pressure on commodity prices.
Understanding the CPI
The Consumer Price Index (CPI) is a metric that represents the price changes of a basket of 955 different products and services. For this calculation, monthly prices from 29,000 different stores in 177 municipalities are gathered.
The CPI basket is divided into twelve categories;
- food and non-alcoholic beverages
- alcoholic beverages and tobacco
- clothing and footwear
- housing
- household goods
- health
- transport
- communication
- recreation and culture
- education
- hotels, cafes, and restaurants
- other goods and services.
Inflation and Deflation Impact
According to Eurozone statistics, high inflation can devalue money, affecting citizens’ purchasing power. This could also have negative repercussions on the overall economy, potentially reducing economic activity and increasing inequality. Deflation, or negative inflation, can be equally damaging. Falling prices create a vicious cycle where people delay purchases in anticipation of lower prices, potentially stagnating the economy.
Role of the European Central Bank
To maintain price stability, “the European Central Bank must keep inflation low, stable, and at predictable levels,” states the Bank of Spain.
Core Inflation in Spain
In addition to the general CPI, core inflation is also reported, which excludes volatile elements like unprocessed food and energy prices. This index provides a more stable picture of inflation.
European Context
Eurostat, the EU’s statistical agency, also publishes monthly inflation rates for EU member states and the eurozone, as well as the average inflation rate for both groups of countries.
Given the impact of inflation and deflation on the economy and daily life, closely monitoring these figures is crucial. Both national and European policy play a vital role in this regard.
Also read: Spain first major economy within EU with inflation below two percent