Research Dept. News
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Monthly Report, num 358 - June 2012
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Spain: overall analysis - Prices
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Spurious upswing in inflation
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Inflation is up by two tenths of a percentage point and stands at 2.1%.
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Inflation is the most frequently used term to refer to the variation in the consumer price index (CPI), which is based on the trends in the price of consumer goods and services acquired by households resident in Spain. The price fluctuation is normally compared with the previous month or the same month in the previous year and is closely related to the dynamism in economic activity. However, April's upswing in inflation is not associated with an upswing in activity but rather, and as we anticipated last month, with the government's intervention in the price of electricity, gas and tobacco.
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This rise is due to intervention in gas, electricity and tobacco prices.
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After seven consecutive months of falls, the year-on-year rate of change in the CPI increased by two tenths of a percentage point in April compared with the previous month and stood at 2.1%. An increase of this size has not been seen since precisely a year ago, when the quarter-on-quarter growth in the economy was 0.2%. On the other hand, in the first quarter of this year the economy shrank by 0.3% compared with the previous quarter and forecasts by the consensus of economists point to even greater contraction in the second quarter. So the main reason for this upswing can be found in the 9.4% year-on-year change in the price of electricity, the 8.5% rise in gas and the 6.5% in tobacco.
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Monthly inflation reaches 1.4%, the highest rate for the last 6 years.
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Regarding electricity, and in addition to the adoption of other measures related to the distribution, capacity and transport of electricity firms, the 7% increase in last resort tariff (TUR) for domestic consumers, 4.1% for small and medium-sized firms, 2.8% for medium-sized industries and 0.9% for large industries led to a monthly increase of 8.1% of its price. The only other time such a large increase has been seen in the last decade was in April 2011. The government also increased the official gas tariff by 5%, leading to a 1.0% rise in its month-on-month rate of change.
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Core inflation falls by one tenth of a percentage point and stands at 1.1%.
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On the other hand, the modification of the special taxes applicable to tobacco products led to a month-on-month rise in its price of around 3.9%. If we add to these three items the contribution made by clothing and footwear, whose monthly inflation rate can be explained by the start of the new spring season, we find the main reasons for the percentage month-on-month change in the CPI in April reaching 1.4% and being the highest it's been for the last 6 years.
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If we exclude the most volatile elements from our analysis, namely fresh foods and energy, underlying inflation saw a year-on-year change of 1.1% in April, one tenth of a percentage point less than the previous month. Weak household consumption, down 0.6% year-on-year in the first quarter, will keep the variation in core inflation very contained.
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Given the temporary nature of April's rise, any containment in inflation over the coming months will largely be determined by the trend in oil prices. In fact, in April transportation was the item that pushed down the annual CPI rate the most, as this includes the price of vehicles, down 0.2% compared with the previous month, and fuels and oils, which rose less than in the same month last year.
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Although, in the first two weeks of May, the price of Brent quality oil in dollars fell by 5.8%, its price in euros only decreased by 3.5% due to the depreciation of the euro/dollar exchange rate. As the euro continues to lose value compared with its US peer, Spanish households will be less able to take advantage of the lower oil prices and inflation for fuels and oils, currently standing at 8.5% year-on-year, will moderate to a lesser extent.
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With regard to an analysis of the competitiveness of Spain's economy, the inflation differential compared with the euro area decreased in April by three tenths of a percentage point. In principle, this means that our cost structure, which is passed on to the market through prices, has improved at a slower rate than in March compared with our main trading partner.
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However, if we exclude energy from the basket of goods in our analysis (which includes electricity and gas), as well as food, tobacco and alcohol (the two latter items subject to highly disparate tax rates in the different European countries), then the differential remains constant at 1.0%. The graph above shows how, if these elements are excluded, the Spanish economy is continuing to gain in competitiveness with regard to Europe at the same pace as last month.
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The economy will continue to regain competitiveness in the coming years.
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Apart from fleeting rises in inflation, the worsening condition of the economic situation will stabilize inflation at around 2.0% in 2012 and, unless there is an unexpected fast recovery in the economy, the annual rise in prices will be around 1.4% for the whole of 2013. One positive note is that, over the next two years, Spain's economy will continue to gain in competitiveness, key to improving the foreign sector and the foundations for future growth.
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