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January sees inflation cool off
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Inflation falls by 4 tenths of a percentage point to 2.0%.
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In the first month of the new year, the year-on-year rate of change in the consumer price index (CPI) fell by 4 tenths of a percentage point compared with December and stood at 2.0%. Inflation therefore recorded almost nine consecutive months of falls with the only exception being last September, when it rose slightly by one tenth of a percentage point. This reduction of 1.8 points in less than one year can be explained both by the series of tax and tariff decisions taken by the government and also the recessive tone of activity.
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The freezing of the electricity tariff has been a major contributor to this fall in inflation. In stark contrast with January 2011, when electricity rose by 8.2% over the previous month, this year it has stayed the same, hence the base effect which has reduced its year-on-year rate of change from 9.6% in December to 1.3% in January.
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Prices reflect the weak consumption.
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Tobacco and gas prices haven't been raised either. The disappearance of the base effect caused by the tax hikes on tobacco in December 2010 has pushed its inflation rate down by 11.5 percentage points in the last two months. For their part, stable prices have reduced gas's rate by 3.6 percentage points. However, although these three elements, electricity, tobacco and gas, have reported significant reductions individually, as a whole they scarcely add up to 6.6% of Spain's basket of consumer goods, so we must also credit some of the drop in inflation to the overall weakness in domestic demand.
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The National Accounts system for the last quarter of 2011 revealed that the Spanish economy shrank by 0.3 percentage points compared with the previous quarter. In year-on-year terms, household consumption fell by 1.1% while general government reduced its consumption by 3.6%. The result of this lower demand can be seen in a widespread fall in prices in the market, visible in January's inflation figures.
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Oil pushes up inflation.
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The clearest case of price drops occurred in communications, down 3.6% in year-on-year terms, pushed by the prices of telephone services whose inflation fell by the same amount over the same period. Another evident example of the weak demand is leisure and culture, whose prices fell by 2.4% overall just in the last month, their biggest monthly drop since the crisis began.
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Weak domestic demand is precisely the reason for the year-on-year rate of change of core inflation, which excludes fresh foods and energy, falling by two tenths of a percentage point in January to 1.3%. Core inflation has followed a similar pattern to general inflation, accumulating a sharp drop of 4 tenths of a percentage point in the last two months. This decrease is quite significant as core inflation is less volatile than general inflation and such a sharp drop has not been seen since the start of the great recession (the similar decrease occurring last July was due to the disappearance of base effects because of the hike in value added tax).
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On the other side of the spectrum, fuels and oils were the item that pushed inflation up the most in January, posting a year-on-year increase of 9.4%. As a result of updating the weightings of the different items in the consumer basket, energy products have increased their relative weight by 0.08 of a percentage point, now accounting for 11.4% of the shopping basket. This new weighting, together with the inflationary pressure of oil prices, might widen the gap between general and core inflation over the coming months.
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In fact, the performance of oil prices affects the inflation forecast. Greater geopolitical uncertainty in the Persian Gulf has pushed up the price of Brent quality crude which, according to our forecasts, will be close to 119 euros per barrel on average until the end of the year. This new situation raises inflation slightly, which would be around 1.6% for 2012 as a whole.
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The differential with the euro area returns to the levels of 2009.
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Looking at Europe, although the quarter-on-quarter squeeze in activity in the euro area coincides with that of Spain, in year-on-year terms the euro area grew by 0.7% in the last quarter compared with Spain's 0.3%. This lower growth in gross domestic product (GDP) in Spain is reflected in January's harmonized index of consumer prices or HICP (the indicator that allows a comparison of the different European consumer baskets). The figures provided by the Spanish Statistics Institute (INE) place the year-on-year rate of change in the HICP for Spain at 2.0% while Eurostat forecasts an HICP of 2.7% in January for euro area as a whole. A gap of this size (7 tenths of a percentage point) has not been seen since July 2009, suggesting that Spain is becoming more competitive abroad via prices.
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The drop in prices helps to restore competitiveness.
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Although the sharp drop in inflation seen over the last few months reflects weak domestic consumption, it is helping the economy to make progress in its process of internal devaluation. The culmination of this process will allow Spain to compete abroad via prices and to lay the foundations for future growth.
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