MADRID – Unprecedented electricity prices in the wholesale market are already hitting Spanish households and businesses in the wallet. In August, electricity bills were on average 34.9% more expensive than in the same month in 2020. In addition, expensive electricity prices have an impact on many other costs.
The high prices of energy products and especially expensive electricity are the main cause of rapidly rising inflation in Spain. This is also the case in much of Europe. Consumer prices in August were 3.3% higher than a year earlier. 38% of this increase is due to the rise in electricity prices. According to estimates by INE, the Spanish Statistical Office, Spanish households spend about 3.6% of their budget on electricity.
Consumer price index
Weighting the electricity inflation rate for August (34.9%) by this factor reveals how much electricity has actually contributed to the increase in general inflation. Thus affecting the consumer price index (CPI) for citizens, businesses, and the state. This includes many of the rents paid in Spain, pensions, some salaries, tolls, and other municipal charges. For example, the cost of public parking spaces in the city of Madrid.
Impact on rents
One of the most direct, and at first sight, perhaps less obvious, indirect effects of electricity increases is the increase in rents. In Spain, many rental contracts are adjusted upwards every year on the basis of the CPI of the last month before signing. Meaning if a contract was signed in September last year and was to be reviewed this month, the reference would be the CPI increase between August of those two years.
An example calculation
The average rent of a Madrid household in 2018 was €848 per month. If a tenant had signed his contract in September last year and had to renew it this month, he would now pay €876, i.e. €28 more per month. €10.60 is exclusively due to the effect of the increase in electricity prices on consumer prices. After one year, the rent increase due to increased electricity prices has reached €127.
In other cities, the increase is also significant. In Barcelona, the average rent is €803, the average monthly increase is €10.70, which rises to €128.40 in twelve months. Whereas, in Valencia (with an average monthly rent of €500), the monthly increase attributable to electricity is €6.27. This is €75 on an annual basis. In Seville, with an average monthly rent of €600, the price of electricity increases indirectly by €7.50 per month. That equates to €90.00 in a year.
Impact on benefits and pensions
The allowance that divorced parents who do not have custody of their children have to pay their ex-partner to contribute to the children’s education is also CPI-indexed. For a monthly payment of €200 euros, the increase amounts to €30 euros per year. The increase in electricity bills can also have a significant effect on the already strained pension system. Each year, contributory pensions are revalued according to the average value of the CPI increases recorded in that year. According to the latest forecasts by Funcas, a think tank of Spain’s major savings banks, average inflation could reach 2.7% by the end of the year. Hypothetically, if inflation at the end of 2021 is still 40% of this annual average – as it was in August – the electricity increases alone would increase spending on pensions by between €1,350 and €1,512 million.
Consequently, the Spanish state would have to spend between €3,780 and €3,375 million to pay for the revaluations. These estimates are the result of calculations by Funcas. They estimate every percentage point rise in the CPI means an additional expenditure of 1.4 billion euros on pensions. And by Fedea, the Spanish Bureau of Applied Economic Research, which estimates the figure at 2.5 billion more for every 2 percentage points rise in inflation. Fedea estimates the average inflation rate for the end of the year at 2.7%. For a pensioner who received a monthly benefit of €1,192 in August – the pension benefit would increase by €32.20 per month, of which €13 would be due to the effect of electricity inflation.
In addition, the general state budget (PGE) states that pensioners must be compensated if the average increase in the CPI in a given year exceeds the increase forecast for the previous year. This takes the form of an extra payment popularly known as ‘la paguilla’. For this year, the PGE predicted the average inflation rate would be 0.9%, a totally unrealistic forecast. If Funcas forecast of 2.7% comes true, the state must compensate pensioners with an additional 1.8% increase in 2022.
If the same criteria as mentioned above are applied, the additional compensation would cost the treasury between €2,520 and €2,250 billion. Of this, between 855 and 957.6 million would be due to electricity inflation.
Little impact on wages
High inflation can also have an impact on labour costs. This relates to companies that have labour contracts that include wage increases linked to the CPI and benefit their employees. Painting a picture of this is more difficult because only 15% actually link wage increases to the CPI.
Tolls and parking
Previously, many public tariffs and services – such as transport passes – were indexed to the CPI and adjusted each year to reflect its fluctuations. However, a 2015 law has ended the vast majority of this reliance, although there are still some exceptions.
One of the most notorious is toll roads. Accordingly, the rates for these roads are also adjusted every year to reflect the increase in the average CPI. A calculation similar to the one used for pensions shows an annual increase of 2.7% for a motorist taking the Villalba (Madrid) – Villacastín (Segovia) route through the AP-6 tunnel. For each journey, 22 cents more is paid, of which 8 cents would be due to electricity inflation. In the case of a heavy vehicle, it would be as much as 57 cents. 22 cents of this would be for electricity. On the Málaga-Estepona road, one of the busiest toll roads in Spain, the increase would be 21 euro cents for a light vehicle (of which 8 cents for electricity) and 43 cents (16.3 cents) for a heavy vehicle.
Another group unexpectedly affected by the increase in electricity prices is the municipal public car parks in Madrid. Annually, they adjust their rates upwards based on the CPI of September of the previous year. Assuming inflation remains at 3.3% in September, parking in the low-emission zone for a five-hour period would be 50 cents more expensive in 2022, of which 19 cents is due to electricity.