Inflation stands again at highs since 2023 due to the increase in fuels

BarcelonaThe cost of living for families continues to rise due to the increase in energy prices –particularly fuels–, and it is at its highest since February 2023 for the second consecutive month. Specifically, in September, the prices of all consumer goods and services in Catalonia soared by 4.5% compared to the same month a year ago, according to the Consumer Price Index (CPI) data published this Wednesday by the National Statistics Institute (INE).

Compared to August, price growth in Catalonia is 0.1%, two tenths of a percentage point less than the increase recorded in Spain. In the country as a whole, annual inflation stood at 4.9%, six tenths more than that recorded during the previous month, just asthe INE had already announced two weeks ago.

The annual CPI increases above 4% in both Catalonia and the country as a whole are more than double the 2% annual target set by the European Central Bank in the medium and long term. They also place the Catalan and Spanish inflation rate above the European average and that of the other major economies in the eurozone, such as Germany, Italy, and France, which in September recorded price increases between 3% and 4%.

Furthermore, core inflation, which does not take into account the most volatile elements such as energy prices, has risen by two tenths of a percentage point both in Catalonia, to 3%, and in the country, to 3.1%. The INE points to the prices of recreational activities, sports, and culture, as well as transport, as the main factors for the price increase.

Energy punishes pockets

The root of the rise in oil prices lies in the war in Iran initiated by the United States and Israel last February. Since then, the conflict in the Persian Gulf has decimated the production capacity of some of the world's main crude oil exporting countries and has caused Tehran to close the transit of ships through the strategic Strait of Hormuz, through which 20% of the world's oil exports passed.

The conflict has sent the price of oil soaring, which in September once again exceeded the symbolic barrier of 100 dollars per barrel in the case of Brent, the benchmark crude in Europe. This Wednesday the price per barrel stood above 106 dollars.

The rise in energy costs has been felt in the bills of Catalan families. Thus, on average, the prices of electricity, water and natural gas were 13% more expensive in September than a year ago and 2.4% higher than last August.

Despite this, fuels are the element that has grown the most within the entire family consumption basket: in one year, the price of gasoline and diesel has risen by a notable 24.4% in Catalonia. Between August and September, the increase was 4.8%, according to INE data.

Faced with this situation, the Spanish government approved a package of measures at the end of March, including VAT and fuel and electricity tax cuts, to alleviate the effects of the energy crisis on citizens' finances. These initial measures have been revised up to the last package, approved at the end of September, which is why it has a limited effect on the CPI data presented today by the INE.

In a statement, Pedro Sánchez's executive boasted that "the response plan measures continue to moderate the rebound in inflation". Among the measures that are being maintained is the reduction of 20 euro cents per liter of gasoline and diesel, which is extended until, at least, November 1st. The limit on the last resort tariff for natural gas is also maintained.

However, neither VAT cuts nor special tax cuts on the electricity bill come into force, as the price of electricity increased by 11.4% annually in September on average in Spain, below the 15% that, in accordance with the measures approved by the government, would activate the tax reduction.

No second-round effects

For the moment, the bulk of inflation is concentrated mainly on rising energy costs, and so-called second-round effects are not yet being detected—the phenomenon by which the continuous rise in electricity, gas, and fuel prices ends up forcing companies to pass this cost increase on to the price of their products. This means that what was initially just an increase in energy costs ends up becoming a generalized price hike for most of the shopping basket.

In the previous inflationary episode in Europe, which took place following the Russian invasion of Ukraine in February 2022, this phenomenon occurred at the end of that same year and during 2023, months after the initial energy price shock caused by the conflict and the sanctions imposed by Western governments on Moscow.