CPI soars to 7.4%

MADRIDNot even a week ago, the Bank of Spain anticipated that inflation forecasts in Spain would have to be revised "significantly". This Monday, the National Statistics Institute (INE) has proved it right. In spite of the fact that in January prices receded, the year-on-year evolution of the consumer price index (CPI) this February has broken all records. The initial price increase – yet to be confirmed – is estimated at 7.4%, a figure not seen since 1989. The main reason is the record hikes in fuel prices, followed by food and non-alcoholic beverages and, finally, the upward spiral of electricity prices – an element that is likely to be aggravated by the war in Ukraine – according to the statistics published this Monday.

Now, if there is one thing to keep in mind when analysing this February's CPI, it is last year's scenario. The impact of what economists refer to as the base effect (the fall in prices a year ago explains part of the strong year-on-year growth recorded a year later) has been very pronounced. In February 2021, prices in the state as a whole were stagnant: there was a 0.5% month-on-month drop and a 0.1% year-on-year drop.

Unlike now, what accounted for part of the drop in prices a year ago was precisely energy, in particular the drop in electricity consumption in Spain after the cold snap in January. Moreover, a year ago, analysts highlighted the exceptional production of renewable energy thanks to wind, which made it possible to cover part of the month's demand. In fact, the daily wholesale market price in 2021 started (in January) at around €60 per megawatt hour, whereas in February it reached €28 per megawatt hours. From that moment on, however, the current upward spiral of prices began partly because a year earlier, in 2020, tougher restrictions had begun and prices were falling every month.

The INE highlights that this February there has been a generalized increase in prices in most of the components that make up the CPI. It points out the increase in the prices of food and non-alcoholic beverages, as well as fuel. In addition, the INE incorporates data from the underlying CPI, that is, the figure that does not take into account products with more volatile prices such as unprocessed food and energy products. In this case, it grew by 3%, i.e., six tenths above the January figure.

Uncertainties over Ukraine

Considering that the outbreak of the war in Ukraine was last Thursday, it is still too early to determine the impact of the conflict on the provisional data for this February. However, what the supervisory bodies agree on, but the Spanish government also assumes, is that the situation will not only exert more pressure on the CPI (it will surely affect the March figure), but will lengthen the current upward spiral of prices and, in particular, of energy. In fact, the Minister for Ecological Transition, Teresa Ribera, acknowledged a few days ago that no one dares to put an end date on the situation and opened the door to prolong approved fiscal measures if prices continue at the same level.