Spain and Germany are feeling the pain of inflation

by Shaun Richards

This morning the focus has switched to Spain as we see yet another record in the inflation arena. You would have to have not much of a heart to feel no sympathy for Spanish workers and consumers after reading this morning’s official release.

The estimated annual inflation of the CPI in March 2022 is 9.8%, according to the flash indicator prepared by the NSI.
This indicator provides a preview of the CPI which, if confirmed, would mean an increase of more than two points in its annual rate, since in February this variation was 7.6%. This rate would be the highest since May 1985.

This is their domestic measure of inflation which I am looking at because we are now seeing levels of inflation which need to be compared with the pre Euro area era. In terms of the breakdown we are told this.

This development is due to generalised increases in most of its components. These included increases in electricity prices, in fuels and oil prices, and in food and non-alcoholic beverages prices, higher this month than in March 2021

So there will be little surprise about the leader of this particular pack. But we are seeing a double whammy on the essential items front with food price inflation now chasing energy inflation. Indeed if you can avoid both, and the best of luck with that, the inflation picture improves considerably.

For its part, the estimated annual variation rate of underlying inflation (general index excluding non-processed food and energy products) increases four tenths to 3.4%. If confirmed, it would be the highest since September 2008.

Right now research assistants and Phd’s at the Bank of Spain and ECB will be beavering away to explain how those non-core items are not really important after all. I do hope they wont be using the wi-fi to do it.

As it happens the Euro area measure is showing the same annual rate of inflation.

In March, the estimated annual variation rate of the HCPI stood at 9.8%, more than two points
higher than the one registered in the previous month

But it has got there by catching up in March.

For its part, the estimated monthly variation of the HCPI is 3.9%……..Consumer prices registered a rate of 3.0% in March compared to February, according to the
leading indicator of the CPI.

El Pais has simmarised the state of play below.

The Ministry of Economic Affairs has detailed that 73% of the price increase is due to the impact of the invasion of Ukraine on energy and unprocessed food, and sees it as urgent “to reverse this upward trend” to deploy the aid package as soon as possible approved on Tuesday, of up to 16,000 million (6,000 million in direct aid and tax rebates, and another 10,000 million in ICO credits). Its measures include a discount of 20 cents on the price of fuel which goes into effect this Friday.

As you can see the PR operation to blame things in the war in Ukraine is in full swing and they will be hoping that at least some forget that there was an issue before then. The idea of an aid package is similar in an attempt to deceive because it switches the cost from the consumer to the taxpayer who is mostly the same person. It may make the inflation numbers look better for the same situation as the fuel price cut will for example but the taxpayer gets the tab.

Also we see that central bankers seem to be cut from the same piece of cloth.

The governor of the Bank of Spain, Pablo Hernández de Cos, already announced the day before that the inflation data would be “particularly negative”, and advocated an income pact between workers and employers to prevent feedback.

It was only yesterday we were reminded of similar views from Bank of England Governor Andrew Bailey. Whilst the Governor of the Bank of Spain receives a relatively paltry 215,000 Euros a year in pay and benefits it is still enough for him to be pretty well insulated from inflation concerns.

The transport strike has affected both inflation and economic output.

MADRID, March 29 (Reuters) – Steel giant ArcelorMittal (MT.LU) said on Tuesday it had idled three steel mills in Spain and partly closed two others after a two-week truckers strike disrupted supplies of scrap metal, iron ore and equipment.

The company was forced to suspend output at its Bergara mill, in the Basque Country, on March 16 and at its Legasa and Lesaka mills, in Navarra, on March 26 as a result of the strike, a spokesperson said on Tuesday.

This is added to the supply chain issues as El Pais points out.

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And on the international flank, the confinements of Shenzhen – the most important technological hub in China -, Shanghai – the most populous city – and other cities, within the strict zero covid strategy launched by Beijing, have generated new logistical imbalances and delays.


It is not just Spain that is seeing an inflation surge as Reuters have just pointed out.

BERLIN — German inflation is likely running above 7% in March, regional data from five states suggested, surpassing analyst predictions for federal data that is set to be released later on Wednesday.

The states of Bavaria, North Rhine-Westphalia, Saxony, Brandenburg and Hesse posted annual consumer price inflation in a range between 7% and 8%, coming to an average of 7.54%.


We can hot foot to a speech given by ECB President Christine Lagarde in Cyprus this morning. She opens with an outright attempt to rewrite history.

Before the Russia-Ukraine war began, the euro area economy was rebounding well from the pandemic. The recovery was much faster and more job-rich than after previous recessions.

The economy was slowing in response to the energy price rises that preceded the war. It has made them worse but there were existing problems. In the circumstances the quote below is especially breathtaking even from the woman who described the bailout of Greece as a triumph ( “shock and awe”) just as the economy collapsed.

This strong performance owes a lot to the exceptional policy response in the euro area, where fiscal and monetary policy worked hand-in-hand to protect incomes and demand.

Suddenly the “protect(ed) incomes” seem to be falling.

This effect already reduced income by 1.2% of GDP[2] in the fourth quarter of 2021, compared with the same quarter in 2019 before the pandemic. Expressed in euro, that figure would imply a loss of about €150 billion in one year.

Also if one of the causes began in 2020 how has she got this so wrong?

 This reflects, in part, the decision by OPEC+ to cut oil supply by 9.7 million barrels per day in 2020, followed by the failure of some members to return supply to its previous levels.

In fact we are seeing the opposite of what she forecast.

Based on national surveys, households’ expectations of growth have worsened, while their inflation expectations have risen.

The incomes which only a few short sentences ago were doing so well are now like this.

 This suggests that people are expecting to see their real income (i.e. their income adjusted for inflation) squeezed.

This is a very important point because so of this is due to her actions in increasing the money supply which leads to inflation. Central bankers love to draw attention to the short-term gains from their actions whilst denying the medium and longer-term consequences.

What will she do? Fiddle whilst inflation burns.

Reflecting this uncertainty, at the last Governing Council meeting ECB staff prepared different scenarios to capture some of the possible outcomes……. This is why we are continually monitoring the incoming data and updating our analysis accordingly.

It is hard to know what to say about someone who talks about “further progress” when inflation is treble the target and rising.

But if the medium-term inflation outlook changes and if financing conditions become inconsistent with further progress towards our 2% target,


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