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Inflation persists, but not for long
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The CPI falls by one tenth of a percentage point and reaches 3.0% in October.
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Inflation should be the last thing on our minds right now. Although the year-on-year rate of change in the consumer price index (CPI) stood at 3.0% in October, with a fall of barely one tenth of a percentage point compared with the previous month, the almost flat trend over the last four months looks like it's about to disappear. Given the current state of affairs, our forecast is that inflation will reach around 2.4% by the end of the year and that this trend will continue in 2012, with the annual average rate being around 1.4%.
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Annual average inflation in 2012 will be around 1.4%.
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What is this forecast based on? Leading economic indicators are not exactly encouraging. Consumer confidence fell in October for the third consecutive month (as did the indicator for economic sentiment) and is now almost 5 points below its historical average. For their part, retail sales have seen negative year-on-year rates all year, while industrial production has gradually got worse throughout the year and, in September, posted a 1.5% drop. The figures provided by the National Accounts system for the third quarter show meagre growth in consumption of 0.4% and a public consumption in evident decline.
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Inflationary pressures might fall even further if uncertainty remains high and the various economic agents end up increasing their savings rates as a precautionary measure, which would reduce consumption. The harsh side of this deterioration in expectations can already be seen in the 1.9% fall in employment in the third quarter. The loss of 327,000 net jobs, an unemployment rate of 21.52% and the fact that wages are down by 1.2% (and with this rate being negative for almost three years) does not encourage optimism regarding the performance of consumption in the short term.
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Inflationary pressures lessen both in Spain and Europe.
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Proof of the deterioration in expectations at an international level is the European Commission's downward revision of Europe's growth. Even the European Central Bank (ECB), led by the recently invested president Mario Draghi, reduced interest rates to 1.25% at the beginning of November although inflation in the euro area remained stable at 3.0% in October, far from the 2% target set by the ECB itself.
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This change in interest rates is very unlikely to generate inflationary pressure as the extraordinary liquidity measures present in the system over the last few months have had very little effect on the real economy, a symptom that the vehicles transmitting monetary policy are not well oiled. Moreover, France has presented its most austere budget for the last 50 years, with the aim of maintaining its maximum credit rating, and the expansionary fiscal measures presented in Germany are not big enough to generate inflationary pressure in the euro area. Inflation in the euro area is therefore likely to fall.
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The year-on-year rate of change in the harmonized index of consumer prices (HICP) for the euro area, standing at 3.0%, can be explained both by the methodological change as well as the inflation in the energy component which, together with alcohol and tobacco, prevented the rate from falling in Europe. Proof of energy's significant contribution and relative weight is that core inflation, which excludes unprocessed food and energy products, remained constant in October at 2.0%.
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The winter season pushes up prices compared with September.
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If the situation is so bad and might even get worse, why have prices not already started to fall in Spain? Spanish inflation posted a 3.0% year-on-year change in October, very close to the levels reached in the previous three months. This figure represents a drop of one tenth of a percentage point compared with the year-on-year change of the previous month, due to the lower inflationary pressure of housing and transportation, up by 6.3% and 7.6% respectively.
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This was possible thanks to October's stable electricity prices compared with price hikes in 2010, and also to the falling price of fuels and oils, down in October in clear contrast to the rise in the same month the previous year. The greatest upward pressure came from alcoholic beverages and tobacco, due to the big rise last month that still affects the calculation of inflation. Given that core inflation excludes unprocessed food and energy products, this remained stable at 1.7%.
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Fluctuations in oil prices might affect our forecasts.
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In terms of the monthly change, the CPI was up by 0.8 tenths of a percentage point compared with the previous month, the third consecutive month of monthly increases. On this occasion, it was due to the start of the winter season, which upped the price of clothing and footwear by 10.3%. And the winter is also partly responsible for the rise in heating fuel and gas, applying upward pressure, quite the opposite to leisure and culture, as well as hotels and travel, affected in the opposite direction due to the seasonal component.
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In short, the year-on-year inflation rates of around 3.0% for the last few periods will disappear over the coming months and embark on a clearly downward trend. The lethargy of demand, together with an uncertain immediate future, will restrict consumption even further and push inflation down, which will remain below 2% in 2012.
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These forecasts assume that oil prices will remain stable over the coming months. In the case of fluctuations in this heading, we might see both inflation in the euro area and especially in Spain vary by a few tenths of a percentage point, the latter because it is particularly sensitive to variations in energy prices.
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