Sunday, October 1, 2023

Inflation rose 10.5% to 2.6% in August due to fuel prices and a rise in food prices

Prices increased by 2.6% in August compared to the same month in 2022, mainly due to the increase in fuel prices (1.5% year-on-year and 7.2% more expensive than in July) and food. The INE (National Institute of Statistics) confirmed this Tuesday the increase in general inflation – according to CPI (Consumer Price Index) – for the second month in a row (in July it was 2.3%). Core inflation, however, which does not take energy into account, fell by a tenth to 6.1%.

Brussels is again improving the forecast for Spain’s economic growth in 2023, which will double that of the EU as a whole


Life is 2.6% more expensive than a year ago, when prices already rose to 10.5%. However, the highest interannual interest rate in decades was reached in July 2022, when it rose to 10.8%. The low point of this crisis was reached a few months ago, when the rate was reduced to 1.9% (precisely due to lower prices for fuel, gas, electricity, etc.). This does not mean that prices have generally fallen, but rather that they have risen less on average.

The basket of products and services that represents the CPI has not become cheaper in any month since December 2020. Since the escalation began in February 2021 due to the coincidence of a consumption explosion at the end of the pandemic, problems in global trade, etc. Due to the recovery in fuel or gas, cumulative inflation is 16%. Looking at a different time frame, as the Russian invasion of Ukraine exacerbated this crisis until this month of August, the price increase is 7.8%.

On a monthly basis, the CPI increased by 0.5%. Or what is the same thing, prices have increased compared to 2022 and also compared to last July. On the other hand, the underlying or structural CPI increased by 0.3% monthly.

The base effect that facilitated the weakening of inflation in the first half of 2023 is not as noticeable now and will not be so in the coming months. That is, from January to June, prices began to rise very sharply in the same months of the previous year. Now things will no longer be the same for some products and services, such as fuel or gas.

“Spain is consolidating as the European economy with the highest growth and lowest inflation, which benefits the competitiveness of our companies and also the purchasing power of salaries,” explained First Vice President and Acting Minister of Economy and Digital Transformation, Nadia Calvino.

Loss of purchasing power

In fact, this moderation in general inflation (except for food, which has been above 10% in recent months) has allowed salaries to regain some purchasing power after a sharp loss since 2022. It is not for nothing that Spain is currently supporting the more moderate inflation price increases in the major EU economies (across the Eurozone overall inflation remains above 5%).

The main victims of this inflation crisis are family incomes, which are dealt a double blow by the European Central Bank’s (ECB) interest rate increases to combat this. Consumption is stagnating for the time being due to the strength of the labor market and government measures such as capping gas consumption, discounts on fuel or cuts in taxes on basic foodstuffs or electricity bills.

Last week, the OECD noted that Spain experienced the sharpest fall in energy prices of any country in the organization last year. A decrease of 24.3% in July compared to the same period last year, thanks in large part to the Iberian mechanism.

On the other hand, shopping cart increases are one of the most worrying consequences. With overwhelming cases such as olive oil, whose price has increased by 65% ​​since February 2022 and which recorded a 52% increase in August alone. The price of food in general has increased by 20% since Russia decided to invade Ukraine.

Given this situation, the government decided at the end of June to extend the VAT cut on staple foods that it had approved at the end of 2022. “In order to continue to help citizens better manage the cost of the shopping basket, the VAT reductions will be maintained from 4% to 0% on essential products (bread, milk, cheese, eggs, fruits, vegetables, etc.) and from 10 % to 5% on other basic products (pasta, oil …),” assured the Ministry of Economic Affairs of Vice President Nadia Calviño.

This tax cut (in total the state stops collecting around 1.3 billion, 0.1% of GDP) will be maintained until December 31 if underlying inflation remains above 5.5% in September. If this reference value falls below, it expires from November 1st. “These two tax cuts have proven effective in the fight against inflation, as evidenced by the declines so far this year,” they defended in Economía in June. So far this year, groceries have become 5.3% more expensive.

Companies have increased their profits

Of course, companies’ production costs have also increased. However, various analyses, including that of the Bank of Spain, show that most sectors have increased their prices as much or more than their costs have increased. Or much more, as in the case of oil or electricity companies. In summary, they have improved their margins and achieved higher profits.

Meanwhile, the ECB’s strategy of making financing more expensive in order to curb private consumption and business investment and thus curb price increases risks a deep economic recession and the destruction of jobs. And it ignores that earnings growth has a backlash due to inflation.

Nation World News Desk
Nation World News Desk
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