Regular readers will be aware that as 2016 progressed and the price of crude oil did not fall like it did in the latter part of 2015 that a rise in consumer inflation was on the cards pretty much across the world. This would of course be exacerbated in countries with a weak currency against the US Dollar and ameliorated by those with a strong currency. This morning has brought an example of this from a country which I gave some praise to only on Monday so let us investigate.
An inflationary surge in Spain
This mornings data release from the statistics institute INE was eye-catching indeed. Via Google Translate
The estimated annual inflation of the CPI in January 2017 is 3.0%, according to the An advance indicator prepared by INE.This indicator provides an advance of the CPI which, if confirmed, would increase of 1.4 points in its annual rate, since in December this variation was of 1.6%.
Okay and the reason why was no great surprise to us on here.
This increase is mainly explained by the rise in the prices of electricity and The fuels (gasoil and gasoline) in front of the drop that they experienced last year.
So as David Bowie put it they have been putting out fire with gasoline. As we investigate further I note that El Pais labels it as an Ultimate Hora and gives us some more detail.
The agency blames the acceleration of inflation to the rise in electricity prices, which this month has exploded, affecting mainly consumers in the regulated market of light, 46.5% of households, Which pay according to the hourly evolution of electricity prices in the wholesale market.
Actually that sounds ominous in the UK as the National Grid was effectively promising no blackouts yesterday but at the cost of more volatile ( which of course means higher) domestic energy prices. The actual numbers for Spanish consumers are eye-watering.
The average price of the megawatt hour (MWh) in the wholesale electricity market was on January 1, 51.9 euros. This Tuesday, the last day of January, the average price stands at 73.27 euros, 43.4% more. On Wednesday 25, the average stood at 91.88 euros (78.9% more than January 1), with maximums of more than 100 euros for the time stretches with more demand. Consumers receiving the regulated tariff (Voluntary Price for the Small Consumer, PVPC) will see those increases already reflected in their next receipt of light and have already been noted in the CPI, which has registered the highest level for more than four Years,
I guess they must be grateful that this has not been a long cold winter as such prices would have appeared earlier and maybe gone higher. The push higher in the inflation measure was exacerbated by the fact that fuel prices fell this time last year.
Thus, in January 2016, electricity fell by 13% compared to the same month in 2015. The gas price fell at a rate of 15%, while other fuels (diesel for heating, butane …) went down To 19.9%. Finally, the fuel and lubricants registered a year-on-year decrease of 7.1%.
It would seem that El Pais has cottoned onto one of my themes.
The evolution of oil prices largely explained the behavior of the CPI in Spain. In January of 2016, the oil marked minimums in less than 30 dollars. Now, with the price of a barrel of brent upwards (around 55 dollars), fuels are rising and expenses related to housing are rising: gas, of course, a byproduct, and electricity, which is generated Partly by burning gas.
So far we have looked at Spain’s own CPI but the situation was the same for the official Euro area measure called HICP ( which confusingly is called CPI in the UK) as it rose to an annual rate of 3% as well. This poses an issue for the ECB as El Pais points out.
In any case, inflation is already at levels above the ECB’s target of 2%
Also it points out that Spain will see a reduction in real purchasing power as wage growth is now much lower than inflation.
already at levels that imply a loss of purchasing power for pensioners – the government will only update pensions by 0.25 %, The minimum that marks the law, for officials, whose salaries will not rise above 1%, and the vast majority of wage earners, since the average wage increase agreed in the agreements remained at 1, 06%.
There are also other concerns as to how it may affect Spain’s economic recovery.
As Spanish inflation is above European, the Spanish economy may lose competitiveness, not only because it may affect exports, but also because it may lead to a rise in wages.
A little more prosaic and also for December and not January but we saw this from Germany yesterday.
The inflation rate in Germany as measured by the consumer price index is expected to be +1.9% in January 2017. A similarly high rate of inflation was last measured in July 2013 (+1.9%).
German consumers will be particularly disappointed to note that the inflation was in essential items such as energy (5.8%) and food (3.2%). Of course central bankers and their media acolytes will rush to call these non-core as we wonder if they sit in the cold and dark without food themselves?!
This poses another problem for the ECB as Germany is now pretty much on its inflation target ( just below 2%) and this morning has also posted good news on unemployment where the rate has fallen to 5.9%.
This morning’s headline is this.
Euro area annual inflation is expected to be 1.8% in January 2017, up from 1.1% in December 2016, according to a flash estimate from Eurostat, the statistical office of the European Union.
So a by now familiar surge as we note that it is now in the zone where the ECB can say it is achieving its inflation target. Of course it will look for excuses.
energy is expected to have the highest annual rate in January (8.1%, compared with 2.6% in December), followed by food, alcohol & tobacco (1.7%, compared with 1.2% in December),
Accordingly if you take out the things people really need ( energy and food) the “core” inflation rate falls to 0.9%. But the heat is on now as Glenn Frey would say.
The Financial Times reported this yesterday.
Giles Turrell, chief executive of Weetabix, said on Monday that the company was absorbing the higher cost of dollar denominated wheat but that Weetabix prices were likely to go up later this year by “mid-single digits”.
Sadly the decline of the FT continues as the “may” is reported in the headline as “Weetabix prices hiked” . The Guardian was much fairer although this bit raised a smile.
Although the company harvests wheat in Northamptonshire, it is sold in US dollars on global markets, meaning the cost in pounds to buy wheat in the UK has gone up.
It is hard not to have a wry smile as it was not that long ago in 2016 that the consensus was that inflation is dead and of course before that the “deflation nutters” were in full cry. Any news from them today? Of course the official mantra will be on the lines of this as reported by DailyFX.
ECB’s Villeroy says concerns about rising inflation are exaggerated.
What was that about never believing anything until it is officially denied? It was only yesterday that another ECB board member was informing us that there would be no change in monetary policy for 6 months when today’s inflation and GDP data suggests it is already behind the curve, as I pointed out on the 19th of this month. Although as ever Italy ( unemployment rising to 12%) is lagging behind. As Livesquawk points out not everyone has got the memo.
Spanish EconMin deGuindos: Inflationary Trend In Europe Could Lead To Tightening Of MonPol, Higher Interest Rates
So we see a problem and whilst some of the move in Spain is particular to one month it is also true that the pattern has changed now and so should the response of the ECB as it looks forwards.
UK National Statistician
Thank you to John Pullinger for meeting a group of inflation specialists including me at the Royal Statistical Society last Wednesday. I was pleased to point out that his letter to the Guardian of a week ago made in my opinion a case for using real numbers for owner-occupied housing such as house prices and mortgage-rates as opposed to the intended use of an imputed number such as Rental Equivalence. This will be more important when the UK makes the changes planned for March. Here is the section of his letter which I quoted.
And there is a real yearning for trustworthy analysis that deals with both the inherent biases in many data sources and also the vested interests of many who try to cloak their own opinions and prejudices as “killer facts”.