The Spanish inflation rate reached a peak of 4.9% in September, consistently surpassing the eurozone average for the past three years. This unfavourable differential is particularly pronounced in major components of the Consumer Price Index (CPI), including energy, food, and services.
According to the Bank of Spain, the inflation differential in energy is largely due to the speed at which fluctuations in gas prices on international markets are reflected in consumer electricity prices, both during increases and decreases. Comparisons of energy inflation rates across different countries are complicated by variations in the implementation and timing of tax reductions on fuels.
More significantly, the differential in services has been a persistent source of inflationary pressure in Spain, driven by strong demand. This demand surge is attributed to robust economic and demographic growth, alongside a post-pandemic tourism boom. Additionally, supply constraints stemming from labour shortages have pushed prices in this sector higher than in neighbouring countries. For instance, in the hospitality industry, rising profit margins above the economic average, as indicated by data from the Tax Agency's business margin observatory, highlight this demand factor.
In the case of food, the causes are multifaceted, although there may also be an element of rising margins. These factors could lead to a widespread increase in wages across the economy that outpaces growth in other countries, resulting in a loss of competitiveness in sectors exposed to international competition. These sectors may experience tighter margins due to rising energy costs unless productivity increases sufficiently to offset these expenses.
Addressing such a situation through economic policy requires either restrictive monetary or fiscal measures. However, monetary policy is beyond national control, as it is determined by the European Central Bank based on the overall circumstances of the eurozone, which have not been as robust in recent years compared to Spain's specific context. The remaining tool is fiscal policy, which should have adopted a more restrictive tone recently to counteract demand pressures, a move that would also be beneficial for the sustainability of public finances.
Another potential approach is to address supply-side issues by alleviating bottlenecks, enhancing competition in the services sector through reduced regulatory barriers, and integrating inactive labour into the workforce.
Originally published in La Vanguardia.
