Inflation will fall after the summer, but prices will remain high

Inflation is at the highest levels since 1985. In June, the annual rate of the Consumer Price Index (CPI) was 10.2%. And experts estimate that it will remain above 10% in the data published by the National Institute of Statistics (INE) in July and August.

However, as of September, analysts forecast a moderation in inflation. This will be due to the so-called ‘ step effect ‘, which occurs when prices have risen a lot in a certain period and that, once a year has passed since that strong increase was registered, they strongly moderate their year-on-year variation.

In Spain, this moment occurred from September 2021, when the escalation in electricity prices began. So, the step effect will take place after the summer.

The Funcas analysis team expects that in December inflation will drop to around 8% and that in June 2023 it will break the 4% barrier downwards. That is, it will be half in just six months.

Apart from the step effect, the recent rise of 0.5 points in interest rates agreed by the European Central Bank will also help this slowdown in inflation.

Most experts are betting that rates will rise again before the end of the year, which will further increase the financial burden on households and therefore reduce their available resources for consumption. And the lower consumption, the less tension on the CPI.

The bad news is that this slowdown in inflation will hardly lead to a reduction in the price levels of most of the items in the shopping basket.

The CPI measures the variation in prices, but not their level. That the prices that now rise by 10% grow by only 3% next year will not mean a drop in prices. But a deceleration of the ascent.

If we transfer this to the price levels, it can be better appreciated. Something that cost 20 euro in June 2021 and has risen 10% compared to then now costs 12 euro. And even if the CPI moderates to 3% in June 2023, it will cost even more: 12.4 euro.

Official statistics do not publish specific data on price levels, but the Family Budget Survey does offer data on the unit value of food.

This unit value is not exactly the price, but the estimated value of one unit of each product. It is obtained by dividing the total cost of each item in euro by the total amount consumed (in kilos, litres, etc.).

Between 2021 and 2019, the unit value of a total of 28 food groups has increased by 10% or more. The greatest increase, of 33.3%, has been for tea and infusions. They are followed by strawberries, raspberries and grapes, sheep and goat meat and coffee, with increases of more than 20%.

With increases of over 15% we find dry, smoked or salted fish and shellfish, snacks, citrus fruits, stone fruits and isotonic drinks.

To give some examples in monetary terms, the unit value of a kilo of olives has gone from 6.5 euro in 2019 to 7.4 euro in 2021. That of frozen fish, from 9.4 to 10.5 euro. The one with cheese, from 9.9 to 11.0 euro.

So far this year, prices have risen 6.1% at a general level. In food, 9.4%. But wages are not suffering the same fate.

Many experts believe that raising wages in line with rising inflation can be a double-edged sword. On the one hand, it would improve the financial situation of households. On the other hand, it would encourage consumption and generate new upward pressure on prices.

Although inflation moderates after the summer, the price levels that families will have to bear will continue their upward trend. At least until the middle of next year.

They will be able to deal with these cost overruns by reducing their savings or looking for new sources of income. Another option would be through salary increases, but perhaps the remedy will end up being worse for the disease.

The governor of the Bank of Spain, Pablo Hernández de Cos, has opted to reach an income pact to jointly address the impoverishment derived from the sharp increase in inflation. Complicated months are coming, and the solutions are not easy.