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Date Published: 04/01/2022

ARCHIVED - December inflation in Spain at its highest point in 30 years

ARCHIVED ARTICLE

The cost of living in Spain is expected to keep rising for the first half of 2022, then begin to ease off

<span style='color:#780948'>ARCHIVED</span> - December inflation in Spain at its highest point in 30 years

The escalation in Spain’s Consumer Price Index (CPI) that began in 2021 shows no sign of letting up, with the National Institute of Statistics (INE) recording a 6.7% rise in the cost of living in December in comparison with the previous year.

This inflation figure for December is the highest in almost thirty years in Spain; to find a similar rise in prices you would have to go back to March 1992, when the CPI was 6.9%.

Moreover, core inflation – which doesn’t include the prices of energy and unprocessed food, which are the most volatile components – rose to 2.1%, four tenths of a percentage point more than in November and its highest level since March 2013.

Looking over the course of the whole year, 2021 closes with an average inflation rate of 3.1%, the highest level in a decade. Compare this to 2020, when prices fell by an average of 0.3% due to the effects of the initial shock of the pandemic, and it seems Spain is in an even worse position than originally thought.

Why is inflation so high in Spain?

Unsurprisingly, the unstoppable increase in the cost of electricity accounts for a large chunk of the overall price rises, though food prices, which experienced a notable drop in prices in 2020, also played a role, albeit to a lesser extent.

The rise in inflation in December compared with November has a strong correlation with the evolution of the price of electricity on the wholesale market – where retailers go to buy the energy they then supply to consumers. In December, the wholesale price of electricity averaged 242 euros per megawatt hour (MWh), 25% above November’s level, which closed at an average of 193.43 euros/MWh. Wholesale electricity, which directly affects what almost 11 million consumers pay on their bills and indirectly affects the rest, was five times more expensive in December than last year, when the market recorded an average of 41.97 euros/MWh.

Curiously enough, the prices of petrol and diesel, which were among the most expensive items in November 2021, eased off slightly in December after oil prices decreased at the beginning of the month.

What is the economic forecast for Spain in 2022?

The consensus among leading analysts is that inflation will remain high this year, especially in the first half of the year, before gradually normalising in 2023 and 2024. In its latest macroeconomic projections, the Bank of Spain forecasts average inflation of 3.7% for 2022, a figure notably higher than that of other analysts such as the OECD (3.2%), the Funcas panel (2.9%) and the European Commission (2.8%). All of these commentators, though, agree that this period of increased inflation in Spain is temporary, and will abate.

Analysts are confident that the factors behind the rise in prices will be mitigated over the course of 2022. In Spain and much of Europe, the most prominent one is energy prices, especially gas, a key energy source in determining the price of electricity. Forecasts suggest that gas prices will moderate from next spring onwards due to both an increase in supply and a fall in demand after the winter.

At the same time, the breakdown of the global supply chain and shortages of certain raw materials following the increased demand after Covid restrictions were lifted is also expected to gradually dissipate, in part thanks to the higher spending on services, as the coronavirus situation improves – something that leading analysts expect.

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