The Bank of Spain took advantage of the presentation of an analytical article to warn about the evolution of underlying inflation. In the study ‘Recent evolution of underlying inflation in the euro area and in Spain’, published this Monday, it is pointed out that the pressures on inflation that does not reflect the prices of fresh food and the energy component have intensified in the area of the euro and Spain, reflecting the sustained increase in production costs and some factors related to the pandemic.
The permanence over time of these increases in the most stable components of inflation is uncertain and considers that a relatively contained response of wages and business margins to current inflationary pressures will be essential to avoid the appearance of significant second-round effects and, with it, the prolongation of the current inflationary scenario.
In Spain, the contribution of leisure, restaurants and tourism to the increase in consumer prices in the last year has been significantly greater than that observed in the euro area, both due to the higher price increases in these items and due to their greater weight in the consumption basket.
In contrast, the Bank of Spain indicates that the contribution of items related to transport has been slightly lower than that observed in the euro area.
Specifically, in Spain, the prices related to leisure, restaurants and tourism show a more intense relative increase in the last year –8% in July–, compared to 7% of the price subindex of ‘Equipment and maintenance of housing’ and 5.6% of ‘Transport’.
Some noteworthy factors that the Bank of Spain points out behind the increase in core inflation are the cost of raw materials, housing spending, bottlenecks, the reopening, and the cyclicality of prices depending on the destination of the spending.
If the accumulated increase in prices over the last three years is considered, the most intense increase is observed in the sub-index related to ‘Housing’ (9%), while the index for ‘Leisure, restaurants and tourism ‘ accumulates an increase of 7.9%.
For the Bank of Spain, the contribution of ‘Leisure, restaurants and tourism’ to general inflation in Spain is notable, explaining 1.6 percentage points (pp) of inflation in July 2022, compared to one point in the EMU . “This item represents 20% of consumer spending in Spain, compared to 16% in the EMU,” explains the agency.
In the euro area, core inflation has shown a marked upward profile and has reached unprecedented levels in the history of the Economic and Monetary Union (EMU), after exceeding the maximum records in November 2021, when it exceeded 2.5% , and stand at 4% in July 2022.
All nineteen Member States have exceeded the 3% core inflation rate; in some cases, such as the Baltic countries or Slovakia, it exceeds 8%. Similarly, in Spain, core inflation has shown a sharp increase since the middle of last year, standing at 4.6% in July 2022.
On the other hand, the general director of Economy and Statistics of the Bank of Spain, Ángel Gavilán, foresees a slowdown in economic activity, penalized by the same “headwinds” that weigh on the world and European perspectives, such as inflation, uncertainty, the energy crisis or the tightening of financial conditions.
During his speech at the ‘Swiss Bankers Executive Study Tour’, held this Monday at the Madrid Stock Exchange, Gavilán explained that, despite the strong tourist season, some signs of weakening economic activity are already being observed, such as the case of employment, as well as in confidence indicators and those of consumption and production.
Of course, the General Director of Economy has highlighted the data for the second quarter, with GDP growth higher than expected, driven by the reopening of the economy. However, he has acknowledged that inflation continued to surprise on the upside and spread to the entire consumer basket.
In this sense, from the Bank of Spain they have anticipated that the high levels of inflation “will persist for longer than expected”.
According to the latest forecasts published in June by the body headed by Pablo Hernández de Cos, GDP will grow by 4.1% in 2022 and 2.8% in 2023, while average annual inflation will stand at 7. 2% in 2022 and 2.6% in 2023.
All in all, the Bank of Spain considers that this expected evolution of GDP will allow the Spanish economy to recover the level of output prior to the pandemic in the second half of 2023.