Inflation threatens to remain high, at least in the first half of 2022. The National Statistics Institute (INE) published this Friday the final data for the Consumer Price Index (CPI) for the month of December, in which it revised downwards the general rate (now at 6.5%, compared to the 6.7% observed in the preview) and confirms the underlying rate at a striking 2.1% that puts some economists on alert: the engine of the economy, the subjacent inflation, will suppose a price level that will last longer than expected in the previous forecasts.
With the INE correction, the monthly variation rate of prices in December was 1.2%, below the 1.3% that had been reported. The rise in prices in December was the highest for almost 30 years, in May 1992. The boost in prices continues to be influenced mainly by the increase in electricity prices, 23.3% higher than in December of the previous year.
“Right now we are further than ever from inflation being transitory”, the economist Javier Santacruz declared forcefully to this medium in a consultation on the progress of the month of December. Yesterday, the INE estimated the average CPI at 3.1% (the highest figure since 2011, when it was 3.2%) in an anomalous year in terms of prices. This data represents a extra charge for Social Security accounts, which take the average CPI to revalue public pensions. The December data will be the first to be used to calculate the rise in 2023.
That the rise in inflation reaches a general rate of 6.5% in December, it seems, is the lesser evil. José E. Bosca, associate researcher at Fedea and professor at the University of Valencia, explains to the Economist which foresees a high level of prices until summer, when they will begin to moderate.
However, Boscá also agrees that inflation is a bigger problem than estimated in the summer and October projections. His position at this time rules out inflation that persistently penetrates the economy, although he fears some persistence of high rates throughout the first half of 2022.
Average inflation for 2021 stands at 3.1%, the highest figure in a decade
On the underlying rate -which does not take into account the volatility of food and energy products-, he believes that 2.1% does not go too far outside the parameters established by the European Central Bank (ECB).
Precisely, the vice president of the ECB, Luis de Guindos, launched this week a subtle change in the body’s message on the nature of inflation, stating that “perhaps high inflation is not as transitory as we expected a few months ago.” Yesterday, the president of the organization, Christine Lagarde reiterated that they take “very seriously” the public concern about the increase in the cost of living.
Second round effects
The consequences of inflation also occupy much of the analysis. One of the effects derived from the volatility of the general index, dragged mainly by energy prices, is the contagion effect: conjunctural inflation could permeate the core rate, causing the CPI to become entrenched and causing inflation to be persistent, according to the OECD.
Boscó and the largest business organization in Spain, the CEOE, warn about these second-round effects. On the table, issues such as loss of competitiveness of Spanish companies compared to the European environment. Despite the fact that the Eurozone continues to set historical highs with a general rate of 5% and an underlying rate of 2.6%, above expectations, the figures that Spanish companies have to bear are above the average of neighboring members of the euro, taking away capacity from the private sector.
The CEOE states that this inflation “implies a significant reduction in business margins in these sectors at a delicate moment for many companies after months of crisis and restrictions on activity”, in line with Boscó’s warning. To avoid the contagion or drag effect, the European Central Bank advises avoiding the transfer of the impact of the increase in the price of raw materials at the final price or wages.
Precisely wages would be a mitigating factor for inflation. Raising remuneration based on biased data from an abnormal year poses another risk to prices. This increase, explains Boscó, should be fixed “two or three years ahead”, when the recovery was consolidated.
Funcas: 5% inflation in 2022 and ‘contagion effect’
Funcas revised its inflation forecasts for 2022 upwards this Friday after having registered a higher-than-expected result in December 2021 due to higher electricity and food prices, according to the entity. Thus, on its central stage, Funcas estimates that IPC rates will remain above 5% in the first months of this year before moderating.
The scenario proposed by Funcas contemplates a drop in the price of oil to 75 dollars and a fall in the price of electricity for the spring, in line with the prices reflected in the futures markets.
For December 2022, Funcas projects a totally moderate scenario, with prices very different from those currently observed: it expects an inflation rate of 0.6%, compared to the 0.4% previously estimated, and an average annual rate of 3.7 %, compared to 2.9% previously projected. For the time being and as can be seen, Funcas is staging an inflation of a conjunctural nature.
But the organism send out a big announcement: the contagion effect that is already taking place in prices. “The increase in inflation in December had a very generalized origin, which indicates that a transfer of the higher production costs towards final prices for consumption is taking place“, warns María Jesús Fernández, senior economist at Funcas.
Thus, among the analysts themselves there is negative surprise due to the behavior of prices compared to those previously estimated. The forecast for the December figure was 5.8%, with a deviation of 0.7% on the observed general CPI. Similarly, the deviation on core inflation was 0.2%, projecting 1.9% compared to the final 2.1% estimated by the INE.
Energy products raised their interannual rate to 40.2%, with a monthly rise in electricity of almost 20%. Electricity is 72% more expensive than a year ago. In addition, another basic product such as processed food, an item also within the underlying one, grew another 1%.