Inflation accelerates an upward path that will not stop until the beginning of 2024
Consumer prices have taken flight again in recent months. Since inflation hit a low last June, the CPI has risen again to stand at 3.5% in September and everything indicates that in the coming months the rise in the cost of living will continue to accelerate until the beginning of 2024. The Bank of Spain expects inflation to reach 5% again in the first quarter of 2024 and analysts such as Funcas – the think tank for the former savings banks – predict similar levels.
A good part of this “rebound” in inflation, especially the one that will occur in the last months of 2023, is due to the statistical 'base effect'. And even if consumer prices were frozen until January – something practically impossible – inflation would still remain above 3% throughout that period.
To the point that if Funcas' inflation forecasts are taken as a basis, it can be said that three quarters of the increase in inflation expected for October will be due to this statistical effect.. While in the months of November, December and January the base effect would explain 60% of the expected increase in the interannual CPI.
This 'base effect' is still a consequence of how inflation is usually measured. In the end, the CPI data that is known each month is still a percentage that reflects how much prices have risen compared to the same month of the previous year.. Therefore, the figure depends on both the prices in the current month and those recorded last year. And what happened in the final part of 2022? Well, consumer prices fell: in January 2023 they were 0.5% lower than in August 2022. This relief will, in itself, cause inflation data in the coming months to be more unfavorable.
To this we must add that, unlike what happened in the final stretch of 2022, this year price increases are expected to occur between August and January.. Last year, energy prices plummeted in international markets, once the fear of shortages had been overcome and also thanks to the Government's support measures.. However, the final stretch of 2023 is being characterized by a rise in prices in the energy component that comes mainly from the oil side.
Anyone who drives regularly will have noticed: gasoline now costs 10% more than before the summer holidays and diesel costs 18% more than before the summer holidays.. The cuts in oil production promoted by OPEC+ are pushing up crude oil prices around the world, which especially harms importing countries such as Spain.
Uncertainty over support measures
After a winter in which inflation will rebound, the consensus is that from the spring of 2024 it will gradually return to the fold. However, the outlook for next year is surrounded by unknowns.. The first and most immediate regarding inflation will be what happens with the support measures.
The uncertainty surrounding the formation of the Government in Spain makes it difficult to predict what will happen with the support packages that the current acting Executive has been approving in recent months and that will expire with the arrival of the new year if nothing prevents it.. The acting first vice president and Minister of Economic Affairs, Nadia Calviño, said last Monday that she does not rule out extending some of the measures currently in force if the governing coalition manages to renew its mandate.
The 2024 inflation curve will depend on whether or not there is an extension of the support measures and, if so, which ones.. Analysts have prepared their forecasts under the premise that the energy aid package – which includes the entire tax reduction on the electricity and gas bill or the 'Iberian exception' – will not be renewed.
Not extending the measures would cause an automatic rebound in energy prices, which would grow up to 25% year-on-year in spring, according to estimates by the Bank of Spain. However, in the second half of the year it would allow inflation to return to its objective and stabilize price increases once and for all.
At this point, the reaction of households and companies to a possible withdrawal of the measures seems key.. If increases in energy prices are passed on again to the rest of the products, as happened with the initial energy shock, inflation—especially core inflation—will take longer to fall.
On the other hand, higher energy prices would further suffocate Spanish families, who have already endured the Euribor slab for months, which has skyrocketed the mortgages of four million homes.. If households cut their consumption further, companies will end up being forced to cut prices. This would cause a faster decline in inflation, but it would also have consequences on the growth of the economy, which would be penalized.. In favor of households, the drop in inflation that occurred in 2023 will allow them to recover some of the purchasing power lost in 2021 and 2022.