January: Inflation With Asterisks

inflation rises

Fernando González Urbaneja | The INE published, as expected, the leading indicator of prices for January with two basic data: the year-on-year rate stands at 6% (half a point lower than the previous month) and the monthly rate for January is negative by half a point (prices fell in January) compared with the rise of 1.2 points the previous month. To these two figures we should add a third: core inflation (excluding energy and unprocessed food, which is always volatile). This rose by 2.4% year-on-year, two points more than a year ago and three tenths more than a month ago.

In summary, the picture points to sustained inflation, above the 2% target although with a bias towards moderation throughout the year. The economic vice-president estimates that during the second half of the year the CPI will return to the average rates of the last decade. In February last year, prices fell by six tenths of a percentage point, which suggests that the year-on-year rate is unlikely to fall again in February. That said, the following four months (March to May 2021) recorded monthly rises of almost one point each month, suggesting the behaviour of these months in 2022 will allow the CPI to moderate and curb inflationary expectations. With even a little help from energy prices (oil, gas and electricity), a year-on-year CPI closer to 3% than the current 6% could be expected before the summer.

The CPI is important for economic agents’ expectations, both for the sentiment of households and their propensity to consume and the expectations of social agents with respect to wage bargaining and its impact on costs and final prices. This is why it is important to deploy a consistent pedagogy and reasoning on prices that avoids alarmism or complacency, one which guides and does not confuse.

The January data provide an additional element of uncertainty. They initiate a new phase in the composition and compilation of the index that changes the reference year from 2016 to 2021 when composing the shopping basket and the weighting of its components. These are foreseen changes, appropriate to better reflect reality, but which generate biases in their first months of application. In addition, making it necessary to link the series well in order for it to be consistent. The weighting changes, without being very relevant, have an influence on the final results. In the new updated shopping basket, food and clothing lose weighting (31.7% of total expenditure, compared to the previous 33.2%) and expenditure on hotels and restaurants gains (from the previous 11.6% to the current 13%). The same applies to expenditure on housing, household goods and medicine (from 23.4% to 24.4%). There are also changes in the list of products measured, from 977 to 955, and in the data collection system, increasingly based on digital big/scanner data systems.

The CPI is the least inaccurate method of estimating price developments. It does not reflect the behaviour of each individual or household, but it does reflect the behaviour of the average consumer as a whole. There is no alternative, even if it has to put up with criticism from those who do not feel represented and perceive another reality.

In addition to the asterisk that the renewal of the base and the calculation methodology implies, INE has made some specific comments, in an official note, on the price of electricity paid by households. It states it intends to improve the calculation of this price (until now it only calculates the regulated tariff, which has risen the most in recent months) by incorporating the 60% of households that contract on the free market. But it will take a few months to do so due to difficulties in capturing the data. A more exhaustive and complete collection of data in 2021 would have meant a reduction of almost two points in the year-on-year CPI rate. This would have been boosted by the extraordinary increase in the spot market that directly affected the regulated price.

About the Author

Fernando Gonzalez Urbaneja
Over 30 years working in economic journalism. Fernando was founder and chief-editor at El País, general editor at the business daily Cinco Días, and now teaches at Universidad Carlos III. He's been president of the Madrid Press Association and the Spanish Federation of Press Associations. He's also member of the Spanish press complaints commission.