Inflation soars in August and reaches highs of the last three and a half years due to the rise in fuel prices

BarcelonaThe rise in fuel prices and the persistent effects of the war in Iran are driving inflation in Spain to a three-and-a-half-year high. During August, the consumer price index (CPI, the indicator that measures the cost of living for families) stood at 4.3%, according to the advanced data published this Friday by the National Statistics Institute (INE). The figure represents an increase of seven tenths compared to the previous month and is the highest growth rate since February 2023, when the State and the entire euro area were beginning to leave behind the inflation records registered months after the start of the Russian invasion of Ukraine.

"They are higher figures, but also more real compared to those we have had before," points out the executive advisor of the Spanish Association of Financial Advisors (EFPA), Josep Soler, in statements to ARA. According to this expert, the latest data is a more faithful reflection of families' reality, after the VAT reduction from 10% to fuels expired at the beginning of July. In fact, according to the EU Oil Bulletin, the price of fuels has risen by around 20% –24% in the case of diesel and 20% in the case of gasoline– in the last two months.

Given the current scenario, the Spanish government has recalled in a statement that it will maintain the reduction of 20 cents per liter of the special tax on hydrocarbons (IEH) applicable to diesel. Initially, this reduction was to disappear progressively and was scheduled to be only 5 cents per liter in September. However, recent price increases have caused the caps set to reduce aid to be exceeded. Thus, from Tuesday, September 1, the reduction of 20 cents per liter of diesel will be applied again. In the same vein, the central executive assures that it will continue to monitor "minute by minute" the impact that the conflict in the Middle East has on the Spanish economy, along with social agents and the most affected sectors.

Contagion effect

Despite the increase in the general inflation rate, the Spanish government highlights that the rise recorded this August is not fully reflected in the underlying indicator, which is the one that does not take into account energy and unprocessed foods, precisely because they are two products with more volatile prices. In this regard, underlying inflation in August fell by one tenth compared to July, to 2.9% year-on-year.

However, experts warn of a possible contagion effect on the rest of the products. "Given that the conflict [in the Middle East] may be prolonged, it is inevitable that the rest of the products will be affected," points out Soler. Although the executive director of EFPA considers that underlying inflation is "relatively contained," he also recalls that this indicator suffers a delay compared to the general index. If the price of fuels rises initially, in the long run these costs will be transferred to production, transport, and, ultimately, to the final price of products.

On the other hand, the amount of goods and services between July and August increased by 0.7%, the highest figure in intermonthly terms in the last five months. The increase in prices is four tenths higher than that recorded between June and July, when the intermonthly CPI was 0.3%. With this latest rise, the inflation rate in intermonthly terms has accumulated seven consecutive increases since the beginning of the year.

Evolution of interest rates

The governing council of the European Central Bank (ECB) will also be closely monitoring the latest inflation data, meeting on September 10 in Berlin to decide on interest rates. While inflation in Spain has been above the euro zone average for several months – partly driven by more dynamic economic activity compared to countries like Germany or France–, the rebound in this past month of August may be indicative of what is to come. When prices tend to rise and the inflation rate is significantly above the 2% target, one of the tools available to the ECB to stabilize prices is to raise interest rates. Through this monetary policy strategy, financing costs increase, economic activity slows down, and consequently, prices are expected to be contained, thus controlling inflation.

For the euro zone as a whole, the rate is still quite moderate, at 2.9% in July. Be that as it may, the central bank will be awaiting the figures presented by Eurostat on September 1, when the office will release the inflation data for the euro zone for the month of August. In the event of a sharp rebound, experts do not rule out an interest rate hike at the next meeting of the body chaired by Christine Lagarde. "We could see not only an increase of 0.25 points, but even half a point. [...] It will depend on the effects of inflation in other countries," indicates Soler.

On the other hand, the ECB will also have to strike a balance in order not to damage an economic activity that remains weak in some of the major powers of the euro zone. While Spain shows solid growth and remains one of the main drivers of the euro zone – during the second quarter the economy expanded by 0.7% – countries like Germany, France, and Italy registered improvements of 0.2%. In this case, an interest rate hike could also compromise economic growth, a scenario that is also undesirable for the ECB.