The worst moment of the inflationary surge is behind us, but the ebb is likely to be both slow and up and down. Energy has become a factor of deflation, the result of a return to equilibrium in the markets around more affordable prices —although still above the average levels of previous years. Neither the announcement by the oil-producing countries of a cut in production nor the reactivation of the Chinese economy have significantly altered that balance.
Another supply shock —the one that comes from the sudden rise in food prices and the shopping basket— is proving to be more persistent. But we could be reaching a tipping point thanks to the moderation in the sector’s production costs: prices paid by farmers have fallen by more than 5% from the autumn highs (an even more pronounced trend in the rest of Europe). . The dramatic situation of drought is going to make de-escalation difficult, but the weather conditions are being less unfavorable in other neighboring countries, as confirmed by the sharp slowdown in the import prices of agricultural products. In any case, the CPI for food barely rose 0.26% in April, five times less than the average for the previous six months.
The improvement is also seen in non-energy industrial goods, the ones that benefited the most from lower energy prices and the easing of supply bottlenecks. In addition, international competition acts as a containment dam on industrial prices.
Services, however, have become the main driver of inflation. The sector is the only one of the large components of the CPI that steps on the accelerator, both in the euro area (with an increase of 5.2% in April in year-on-year terms), and in Spain (4.3%), well above the records of the past financial year. In Spain, inflation in services already explains 47% of the total CPI, almost 30 points more than a year ago. Many branches of services, such as commerce or restaurants, operate relatively sheltered from external competition, so that companies have been able to fully pass on the increase in costs to their customers. According to data from the Tax Agency, margins per product unit grew by 17% in 2022, compared to 4% in the industry.
Service prices are characterized by a certain inertia, especially downwards, so a drastic change in trend cannot be expected. This persistence will necessarily pass through to inflation even if the other components subside as is foreseeable, since services represent almost half of the total CPI.
The high weight of services also helps to explain the time lag that exists between, on the one hand, the cooling off in demand that the ECB is pursuing with the tightening of its monetary policy, and, on the other hand, disinflation. As a recent study by the central bank itself shows, the impact on the CPI of the rises in interest rates registered to date will occur above all in 2024-2025. Conversely, according to the same study, the effect on the economy and employment will be relatively rapid, evidencing the risk of an overreaction of monetary policy.
In short, the inflation context remains uncertain due to the volatility of some prices, such as food prices. But the trend should be slightly downward, in line with the consensus of analysts who forecast a core CPI of 5.8% on an annual average in 2023 and 3.4% in 2024.
It seems risky to force a more pronounced de-escalation, at least for the Spanish economy, where expectations point to moderation, in light of the recently signed wage agreement.
The boom in the foreign sector continues. Exports increased by 14.6% up to March, compared to increases of between 7% and 10% in the other large European countries. The recovery of sales abroad in the automotive sector stands out, with a rebound of 32% during the same period. Spanish imports, for their part, rose by 4% during the same period, a record barely higher than the European average. All this has made it possible to increase the trade surplus with the EU and reduce the deficit with non-EU countries.
Raymond Torres He is a joint director of Funcas. On Twitter: @RaymondTorres_
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