Spain | High inflation — key factors looking forward

At the end of 1H21, both headline and core inflation remained stable, although at opposite extremes. The former, very high at 2.7% yoy, and the latter relatively low, at 0.2% yoy. Short-term risks exist of a rise in core inflation.

Key points

• Key points:
• Harmonized European inflation data shows the headline rate in Spain increased 0.6pp (yoy) more than in the EMU, while core inflation was 0.9pp (yoy) lower.
• The first key to what has happened is the spike in energy prices, which added 2.5pp to the 2.7pp yoy growth in headline inflation to June, and can be explained by the strong rise in fuel and electricity prices.
• The second is the limited extent to which higher production costs have fed through to consumer goods prices, in an environment of clear recovery in demand, albeit from very reduced levels and with a high number of workers who are either unemployed or furloughed.
• The third factor is the composition of the recovery, which has been heavily concentrated in services, particularly those carried out in a social context and/or outside the home province. Despite this, the price of services has fallen over the last year, especially those of transport and accommodation.
• What we can expect, looking forward, is that the high inflation will be partly transitory, but there will be persistent short-term risks of a spike in core inflation. Our forecasts point to headline inflation of around 2.6% yoy and core inflation in the region of 1.2% yoy at the end of 2021.

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