The war in Iran pushes inflation and impacts families' cost of living
The rise in fuel and electricity prices pushes the CPI in March to 3.3% in Spain
BarcelonaThe war in Iran and the resulting energy price increase have impacted inflation in Spain. Thus, the cost of living for families this March has become notably more expensive compared to February, as a result of the rise in prices of fuels and electricity.
Thus, the consumer price index (CPI, the indicator that measures the evolution of prices of products and services habitually consumed by Spanish households) will close this month with an increase of 3.3% compared to March of last year, according to provisional data published this Friday by the National Statistics Institute. This figure represents a one percentage point increase compared to the annual growth rate recorded in February.
In relation to the previous month, the growth was 1%, six tenths more than the growth recorded between January and February, a "predictable" increase, according to Josep Reyner, president of the Catalan economy commission of the College of Economists of Catalonia.
Impact of the war in Iran
The U.S. began the attack on Iran on February 28 and immediately the price of oil and natural gas began to escalate, caused, above all, by the fact that the Asian country is one of the main producers in the world and that, in addition, Tehran responded to the aggression with attacks on various Persian Gulf states allied with the U.S. that are also among the main crude and gas exporters on the planet.
Furthermore, the most important effect on energy markets was the de facto closure of ship traffic in the Strait of Hormuz, which connects the Persian Gulf with the Indian Ocean and through which, before the war, 20% of the oil and liquefied natural gas consumed in the world passed. The scarcity of oil and gas caused the price of crude to rise, which in the case of the Brent barrel (the reference oil in Europe) went from being around 70 dollars to 100 dollars, with occasional peaks above 120 dollars.
The fact that oil and gas become more expensive has a direct impact on a significant portion of consumer goods and services, such as gasoline and electricity bills. In fact, the Ministry of Economy has assured in a note to the media that the jump in inflation "is mainly explained by the increase in the price of fuels, a direct effect of the conflict in the Middle East".
Government measures
Despite this, the pace of growth in energy prices has moderated this week following the approval of the Spanish government's decree, which came into force last Saturday and introduced tax cuts on fuels and electricity. "Last week, fuels decreased due to the application of fiscal measures, although they continue to experience pressures from international quotes, especially in the case of diesel, due to higher oil prices, freight, and refining margins," the ministry added.
Apart from that, electricity has been the other element that has pushed the CPI upwards, also a result of the war (part of the electricity is produced by burning natural gas or oil). Despite this, the Spanish government has boasted about the strength of renewables in the country, which have helped to "cushion inflation": according to the Ministry of Economy, "Spain's commitment to renewables" has been a "shield against the energy shock from the war in Iran." The executive also recalled that green energy generation sources, such as solar or wind, "today set the price of electricity for 84% of the hours [of the day], compared to 25% in 2019".
Despite the price increase, for now it is still an initial impact. Reyner believes it is "good news" that core CPI – the one that excludes energy and fresh food, which are more volatile – has only grown by a slight 0.1% this month and remains at 2.7% annually, indicating that energy costs are not yet impacting the entire household shopping basket.
To know how inflation will evolve in the coming months, "we will have to see how the war evolves and the second-round effects," opines Reyner, regarding products of all kinds, but especially food. Even if the war were to end in a matter of days, the effects on families' cost of living would be felt for quite some time longer due to the impact on the global energy industry, "given that infrastructure appears to be damaged and that resumption could not be immediate," adds the economist.
