Research Dept. News
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Monthly Report, num 357 - May 2012
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Spain: overall analysis - Prices
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The weight of regulation and taxes
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The CPI falls by one tenth of a percentage point and stands at 1.9%.
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In the last month, the government has taken several decisions that will affect price trends in the coming year. The rise in the regulated tariff for electricity, gas and tobacco products, together with the high price of oil, will push up inflation as from April.
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After two months of stability, in March the year-on-year rate of change in the consumer price index (CPI) fell by one tenth of a percentage point compared with the previous month, down to 1.9%. Inflation has stabilized over the last few months at close to 2.0%, in contrast with the sharp drop seen towards the end of 2011.
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The relative weight of food and non-alcoholic beverages lies behind this drop.
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The main reason for this fall was the group of food and non-alcoholic beverages, down 0.3 percentage points on February and standing at 2.3% in March. Other goods and services, boosted by the price stability of the insurance, also recorded 0.3 percentage points less than in the previous month. Car insurance provides the best example of the base effect that lies behind this fall as, whereas the price of car insurance rose by 2.0% in the first three months of last year, this year prices have remained constant. The drop in vehicle registrations at an ever faster rate since 2012 began might be helping to contain prices. Medical and house insurance also rose less than in the first quarter of last year. The base effect could also be seen in the heading for housing, down 2 tenths of a percentage point compared with February due to the lower increase in heating fuel.
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Transportation and housing exercise the greatest inflationary pressure.
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Food and non-alcoholic beverages, other goods and services, housing, and hotels, cafeterias and restaurants, which also recorded a slight fall, make up little more than half the whole shopping basket and, together, exercise a downward pressure of just over one tenth of a percentage point. On the other hand, in March leisure and culture posted moderate inflation of 0.7%, but this was 0.3 percentage points higher than the rate of the previous month and, together with the rise in clothing and footwear, explains why the final fall in inflation was one tenth of a percentage point. For its part, core inflation, as it excludes fresh foods and energy, remained constant at 1.2%.
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With a view to the future, the items that will continue to pressurize inflation the most will be transportation and housing, as their current year-on-year change in price is 5.2% and 3.1% respectively and both include energy products in their calculation.
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Oil has risen by 15% for the year, leading to a year-on-year increase in the price of fuels and oils in the order of 9.0% for March. Fuel forms part of the heading of transportation, which is the second most important group with 15% of the shopping basket. Another factor which will contribute, albeit to a lesser extent, to pushing up transportation prices will be the hike in urban transport tariffs in several autonomous communities and the hike in aviation duties.
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The price hikes in electricity and gas are in addition to high oil prices.
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For its part, the heading of housing includes not only rental but also the costs resulting from maintenance. Consequently, costs for electricity, gas and other fuels make up a large part of housing-related consumption. In this respect, the government's decision to increase the last resort tariff (TUR in Spanish) by 7% for domestic consumption is in addition to the decision, also by the government, to raise the regulated gas rate by 5%. The aim of these measures is to comply with the Supreme Court's order to limit the electricity tariff deficit in 2012 to 1.5 billion euros and other measures were also taken regarding the payments for distribution, capacity and transport received by the firms involved. Similarly, the hike in gas prices, which is also accompanied by a reorganization of the industry, aims to halt the growing deficit in the gas sector.
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Tobacco prices are on the up due to the hike in special taxes.
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The increase in the TUR for households was complemented by a rise in the regulated part for other groups, so that electricity has gone up by 4.1% for small and medium-sized firms, 2.8% for industry on average and 0.9% for large firms. The latest data available, from the last six months of 2011, reveal that the cost of electricity per kilowatt-hour for Spanish consumers is the highest in Europe. In fact, at the end of 2011, the price of electricity in Spain was 21% higher than in Germany and 66% higher than in France.
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Another of the measures taken by the government that will affect inflation in the coming months is the hike in the special taxes on tobacco. In addition to value added tax (VAT), the government also charges duty on alcohol and alcoholic beverages, beer, electricity, hydrocarbons, tobacco and other intermediate products via an additional indirect tax. These goods share the characteristic of being inelastic; i.e. demand falls to a lesser extent when their price increases. The higher tax on tobacco products aims to produce additional revenue totalling 150 million euros, according to Spain's Budget. In 2011, 18.98 billion euros were collected from special taxes with hydrocarbons accounting for half this figure, 40% tobacco and 7% electricity. Last year, special taxes accounted for 40% of the total revenue generated by VAT.
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In short, the government's decisions affect price levels as well as revenue. Over the coming months, the rise in energy products will produce inflationary pressures on some groups of items in the shopping basket, although weak demand will prevent this rise from causing any widespread increase in the prices of all the CPI items.
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