Research Dept. News
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Monthly Report, num 353 - January 2012
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Spain: overall analysis - Prices
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The strength of inflation and its inevitable fall
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Inflation falls by one tenth of a percentage point to 2.9%.
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Every day we hear news about the weak state of the economy and, nonetheless, the basket of consumer goods seems to be increasingly expensive. We are not mistaken in our perception. GDP will grow by close to 0.4% in the fourth quarter in year-on-year terms and the forecast for the coming six months is for growth to be negative. But inflation has hardly fallen over the last five months, remaining at levels close to 3.0%. Why is the consumer price index (CPI) so persistent?
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In November, inflation dropped by a mere tenth of a percentage point compared with the previous month and its change was 2.9% in year-on-year terms. This drop of 0.1% can be put down mainly to the decrease in medicine and transport. The reason for the fall in medicine is the encouragement given by the government last summer to the use of generic medicines, forcing doctors to prescribe by active ingredient and pharmacists to provide the cheapest equivalent drug. So drugs and other pharmaceutical products fell in November by 11.2% compared with last year and medicine by 2.9%.
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Inflation will fall to 2.5% in December.
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For its part, inflation for fuels and oils was one percentage point lower in November than the previous month, its year-on-year rate of change standing at 15.2%. That's why, in spite of the drop of 5 tenths of a percentage point in transport prices, this has reached 7.1%. This group, added to that of housing and alcoholic beverages and tobacco, with rates of 6.0% and 10.5%, is pushing up inflation. These three components account for 29% of the basket used to calculate general inflation and half this figure corresponds to transport. This explains why core inflation, which excludes unprocessed foods and energy products, remained unmoved at 1.7%.
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However, a significant drop in inflation is inevitable for December and the forecast is for the CPI to fall to levels close to 2.5%. The reason is the disappearance of effects produced by a 0.7% increase at the end of last year, when there were big price rises in commodities, principally oil, as well as the tax hike on tobacco, sharply pushing up inflation.
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In contrast, in December 2011 a barrel of Brent quality oil posted a small decrease compared with the previous month and the forecast for 2012 is that this trend will continue until it stabilizes at around 77 euros per barrel. For its part, tobacco already saw a sharp price rise in September and no tax changes are expected that will affect December.
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The small drop in November was also reflected in the harmonized index of consumer prices (HICP), which helps to compare European countries as it standardizes baskets of purchases. For the first time since the start of 2010, prices in Spain are growing less in year-on-year terms than in the euro area, 2.9% compared with 3.0% for our European peers. Lower price growth is crucial when exporting, as it leads to gains in competitiveness. Should this trend become consolidated, the price differential would boost a sector that, to date, has been the only driver of growth for the Spanish economy.
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Prices rise more slowly than in the euro area.
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Inflation forecasts for 2012, both for Spain and the euro area, are downward. Proof of this is the lowering of interest rates to 1.0% carried out by the European Central Bank (ECB), as well as the full allotment of liquidity provided by the central authority of the euro area in an attempt to relieve liquidity tensions in wholesale finance markets, measures that will not push up inflation in the short term.
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In the Spanish case, inflation is exposed to various questions that might alter the forecast by one tenth of a percentage point or so. In January we will hear the Ministry of Industry's decision regarding the last resort tariff (TUR in Spanish), which determines the price of electricity in more than 20 million households. The current tariff creates an annual deficit in excess of 3 billion euros and produces an accumulated debt of 22 billion, so that industry is pushing for a rise.
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Moreover, some autonomous communities have announced a rise in various rates on products as diverse as university enrolment, transport, pharmaceutical prescriptions, overnight stays, etc. Whether these measures are finally adopted, their ultimate amount and possible extension to other areas will determine whether they have any visible effect on the CPI. In principle, the lethargy of demand and public consumption, as well as the slowdown in activity, will push inflation down.
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