galloping inflation

Inflation is said to be galloping when the annual rate reaches two digits, as is currently the case in our country (10.2% in June according to the INE).

It would be a mere anecdote if the forecasts made us think that we may soon stop using the double digits to measure annual inflation, but the reality is that the European Commission has just significantly revised its inflation forecast for the Union; bringing the forecast for 2022 to 8.3% and that for 2023 to 4.6%. Europe fears an unprecedented energy crisis next winter when the heating will have to be turned on and, predictably, Russian gas will not arrive.

It is ironic to say the least that Europe did not dare to veto energy imports from Russia in its entirety and that now it is Putin who decides, literally, to turn off the tap and put the European economy in a serious stalemate. Because, if this closure becomes effective, on the one hand we will continue to see the cost of energy increase and, on the other hand, if we do not find an alternative and reach the consumption restrictions, we will see ourselves doomed to a major economic recession in Europe.

A recession that could affect to a greater extent the engine of the European economy, Germany, more dependent on its trade with Russia than Spain for example. And as a button shows; In May, industrial production in Spain increased by 4.6% year-on-year, while in Germany it fell by 1.4%.

But we should not blame this galloping inflation only on the energy bill, and it is that in our country we have, for example, hotels, hostels, pensions and similar accommodation services (subclass IPC 11201 ) increased their prices in June 2022 by 45% compared to the same month of the previous year according to the INE publication.

This type of inflation, mainly driven by demand, should be stopped by the planned increase in interest rates announced by the European Central Bank. Inflation due to supply shocks, such as the possible reduction in Russian gas supply, global supply chain problems or Ukraine’s inability to export its grain, not only will not not be mitigated by the rate hike, but its effects, fundamentally weaker economic growth, will be compounded.

However, there is a third type of inflation, imported inflation, which should be reduced thanks to the action of the European Central Bank. And it is that, if we add to the rise in world prices the depreciation suffered by the euro in recent months, we obtain a cocktail that has been terrible for the German trade balance, which in May recorded the first deficit of its recent history.

Thus, the fear of an economic recession, both in the United States and in Europe, has caused a drop in the price of many raw materials over the past month, so it is to be expected that the impact of this fall in prices could be translated in the months to come by a slowdown in inflation rates in the world, and in particular in Europe if the fall of our currency against the dollar is stopped (a barrel of oil at 100 dollars is not not the same as a euro at 1.18 dollars, than trading at 1 dollar).

And would it be appropriate to increase salaries with this scenario? Well, bearing in mind that the most important cause of rising prices is not an increase in demand, although the economic growth of our country seems solid (with a rate of more than 4% per year), but rather the increase in transfer costs to final consumption, the risk of an inflationary spiral does not seem too high, and, therefore, an increase in wages to mitigate the loss of purchasing power would be necessary to guarantee a certain dynamism in consumption and, therefore, greater economic growth, all the more so in a context of rising interest rates where we are going to have to devote more to the repayment of loans and mortgages.

* Fran├žois Known. Senior State Statistician

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