The consensus of short-term economists points to a reduction in the average growth rate of inflation during 2023. However, the comparative base effect of the year-on-year rate points to a roller coaster of growth that will pick up at the end of the year. The large potential step in the general rate will already be observed this month of March, where a decrease in the general CPI in the order of 2 points in a probable scenario, leaving this estimated general rate over 4%. The rebound last March, when energy prices pushed up the monthly rate by 3 points, will now cause inflation to fall.
“There is a significant step effect in the coming months in both directions,” says the Funcas senior economist, María Jesús Fernández, in conversations with elEconomista.es. The forecasts of the think tank carried out in March estimate that the monthly CPI rises by 0.7% in March, so the step could be even higher than the 2 points estimated, although the increase in February, higher than expected, could modify this step.
In this sense, the month of March 2022 included a significant rise in the energy component, the key prices to measure the impact of the statistical comparison this year, indicates María Jesús Fernández. Last year, the start of the war turned Europe’s energy strategy upside down and, although Spain has not been the country most exposed to energy inflation, in March it already suffered an increase of 18.2% per month, and 60 .9% per year. “The specific effect of energy component in March 2023 inflation will lower the general CPI 1.3 points“, explains the senior economist at Funcas.
At this point, the statistical self-correction of inflation does not imply that prices do not continue to grow; it is simply a statistical effect that economists call mean reversion and that it will cause -as can be seen in the graph- that the inflation of 2023 takes a direction that will be practically indirectly proportional to the data of 2022.
The base effect is more important than usual this year due to the volatility caused by the war and energy inflation that has infected other prices. Those increases (and decreases at the end of the year) so pronounced in 2022 draw an inflation curve with an inverse linebut similar.
This evolution will always take into account the risk of entrenchment of the underlying rate. The senior economist at Funcas places as a condition for this reduction that the underlying rate does not deviate from the forecasts due to a greater entrenchment of inflation, since this rate contains the rate of the reduction of the general CPI rate itself.
Evolution by components
The detailed information offered by the National Institute of Statistics (INE) makes it possible to break down the contribution to inflation of each type of product. The energy chains decreases in its interannual rate between last August and this month of January.
The composition of the inflation has evolved and the basis no longer relies solely on energy. The contagion of energy inflation has been permeating the food. The more expensive fertilizers themselves or the drought during 2022 have caused an increase in the price of food. In fact, processed foods are the component for which Funcas forecasts a higher year-on-year increase (12.1) this year, registering double-digit rates practically every month.
After a rise of close to 28%, energy products are expected to fall more than 10% this year. Demand will drive inflation in services by more than 7%, according to these forecasts.
Thus, in the first months of the year, energy subsides and the future gas prices set by the Dutch TTF show good signs, even falling below 50 euros/MWh. In January, the latest definitive data confirmed to date, food accounted for 3.83 points of the total CPI, which rose 5.9% year-on-year. Services 1.47 points, and industrial goods another 1.45 points of the total.
average CPI of 4.3%
The market consensus that collects Bloomberg It projects an average inflation for Spain of 4.3% year-on-year with slightly less than the first quarter of the year consumed. Funcas forecast is 4.2%. Meanwhile, filtered underlying inflation, which excludes energy and unprocessed food, would remain at an average of 6.2%.
The core CPI would remain above the general rate for practically the whole year, according to these forecasts. In fact, the governor of the Bank of Spain, Pablo Hernández de Cos, has already warned that core inflation will remain high and will gradually reduce the pressure.
The expectations of the citizens of the euro area regarding the future evolution of inflation have registered a “significant” relaxation, as confirmed by the European Central Bank (ECB) in its latest survey of consumers in the euro area.
Consumer forecasts for inflation in the European environment remain around 5% (specifically, at 4.9%), while the outlook for the next three years drops half a point, to 2.5%. The price crisis would be moderately controlled, but it would still exceed the optimum level of 2% pursued by the Central Bank.
In this regard, the consensus of economists that gathers Bloomberg is more positive for Spain and points to that will meet the 2% target again in 2025.
“Inflation expectations remained well below the perceived past rate of inflation, particularly over the three-year horizon,” the ECB noted, warning of increased uncertainty about 12-month inflation expectations.