The summer season, when consumers are using their savings for vacation spending and bars, restaurants and hotels are in high demand as waves of domestic and foreign shoppers arrive ready to whip out their wallets, didn’t seem the most opportune time for a modest price to be accenting. And statistics have confirmed it. Inflation rose 10.8% in July from the same month last year, according to preliminary data released this Friday by the National Institute of Statistics. This is the highest rate in 38 years since September 1984 and exceeds the 10.2% recorded in June.
The Bureau of Statistics attributes the increase to increases in food and non-alcoholic beverage prices, as well as electricity (which fell in July 2021). Also for clothing and shoes, the prices of which are less reduced than in the previous year. And he explains that not even July’s week-to-week drop in the price of gas – it’s already cheaper than before the government-approved 20-cent premium – isn’t enough to offset the rise in other games. Core inflation, which excludes energy and fresh food, rose six-tenths to 6.1%, suggesting its spread is a fact.
The evolution of inflation depends on factors beyond the domestic sphere. It is the result of the multiple tensions that pull at opposite ends of the international markets. On the one hand, the fear of a recession – which has already materialized in the United States – fueled by the central banks raising interest rates and the possible cooling of the real estate sector in China have deflated the prices of metals such as steel , aluminum or copper and they have paid for a barrel of oil in July, still around $100, a historically very high level, pushed back as demand may cool if the economy stalls.
On the other hand, the energy aspect of the war in Ukraine continues to be a resource hog for Europeans. Russia’s reduction in gas supplies to the EU through Nord Stream 1 has pushed the price of natural gas to its historic maximum this week, implying a greater transfer of wealth from countries that need this fuel, which is essential to industry and the generation of electricity to those who create it. Developments in the currency market aren’t helping either: the euro traded below the dollar for the first time in 20 years this month and is still close to parity. Since the green ticket is used to buy energy, it means more euros have to be spent to get the same amount, fueling inflation. And since the breakdown of data for July is unknown, national tourist packages and hotels were among those that rose the most in June.
Ángel Talavera, chief economist for Europe at Oxford Economics, does not expect the inflation phenomenon to slow down any time soon. “In the short term, I think we will remain at record levels of inflation, with small swings up and down, especially given the strong prices for tourism services,” he claims. This increase was announced by market participants themselves: Ryanair expected a 9% fare increase this summer. And internal industry surveys show that hotel rooms have been getting more expensive for months.
If prices are rising and there are fears of a slowdown in the economy, why are reservations doing so well this summer and an almost full recovery in tourism expected? UGT Secretary General Pepe Álvarez recently claimed the right to unorthodoxly ignore the barrage of bad news about recession, crisis and war. “Let them go to hell! We’ll enjoy the summer because it’s ours, we deserve it, don’t give up what we deserve.” Are the Spaniards going on holiday this time and forgetting their calculators at home? José Ignacio Conde-Ruiz, deputy director of the Foundation for Applied Economic Studies (Fedea), believes that after the pandemic “there are many people who want to enjoy the holidays, many savings among those who came out of the pandemic well”.
Raymond Torres, Funcas situation director, agrees. He sees two major factors supporting the tourism boom in the context of inflation. “It seems contradictory, but European households are using the excess savings accumulated during the pandemic, especially at this stage, to spend on services such as hotels, restaurants and travel. And there is a huge inflation differential between the goods sector – energy and food – and the service sector. This is something very unusual. It’s usually the other way around, and prices tend to go up for services. In other words, while airlines, hotels and restaurants are already raising prices, they have had more leeway to do so without hurting demand.
When will inflation go down?
Summer will pass and the question looming over the scene, particularly among lower-income families who are more aware of price hikes on basic services they cannot do without, like food and energy, is when this escalation will end ? . Talavera believes it will take months. “There are clearer signs of commodity prices falling in anticipation of an economic slowdown and I expect this will gradually dampen inflation after the summer, but as long as energy prices continue to rise I don’t think we will until see a significant fall in inflation well into 2023.”
Ignacio de la Torre, chief economist at Arcano Partners, also notes this lag between market movements and real prices. “Although commodities fell in July, they are not yet being transferred to households or companies on a large scale. There is a lag, so energy and food will continue to be high,” he explains. For him, he forecasts clear signs of a fall in inflation in the fourth quarter. In these last three months, the base effect will play a greater role, ie compared to months when high inflation was already registered, over 5%, it will be more difficult for prices to maintain the rate of increase.