Stagflation is tightening its grip on the economy of Spain.

by Shaun Richards

Over the past couple of months we have become increasingly concerned about the economy of Spain which is caught between a burst of inflation and a slowing economy. This morning’s official release will focus more minds on the former.

In September, the monthly variation rate of the general IPRI is 5.2%, the highest since the beginning of the series, in February 1975.

So a rate that might be considered an annual one is in fact merely the monthly rise on its way to making the annual one this.

The annual rate of the general Industrial Price Index (IPRI) in the month of September is 23.6%, almost six points above that registered in August and the highest since December
from 1977.

So the producer price series or the beginning of the inflation chain is singing along with Alicia Keys.

This girl is on fire
This girl is on fire
She’s walking on fire
This girl is on fire

Breaking it down

If we look into the monthly detail we see that the issue is widespread.

By economic destination of the goods, all industrial sectors have an impact
positive monthly

However there is a leader of the pack which should come as no surprise in this environment.

Energy, whose variation of 14.1%, the highest since December 1982, is due to the rise in of the prices of the Production, transport and distribution of electric energy.
Also influencing, although to a lesser extent, increases in the prices of oil refining and gas production; pipeline distribution of gaseous fuels. The impact of this sector on the general index is 4,893/

So our perspective moves on as we see that whilst all categories are rising this monthly rise was essentially an energy one. This provides a real problem for the central bankers and their media acolytes because there is nothing to substitute it with and ignoring it as they love to do with their emphasis on core inflation looks simply ridiculous.

I am presenting the other two groups not only for completeness but because I am expecting rises here in future as the higher energy price costs take their toll.

Intermediate goods, with a monthly rate of 0.9%, which has an effect of 0.241. Excels in this evolution the increase in the prices of the Manufacture of basic iron products,
steel and ferro-alloys, the Manufacture of products for animal feed, the Manufacture of other chemical products and the Production of precious metals and others
non-ferrous metals. Non-durable consumer goods, which presented a variation of 0.3% and an impact
of 0.077, mainly caused by the rise in the prices of the Manufacture of oils and vegetable and animal fats.

Bank of Spain

The Governor of the Bank of Spain gave a speech yesterday and we saw him coming to terms with his previous upbeat view firstly via the sharp change to the second quarter.

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A reduction of such a high magnitude involves, mechanically (that is, if the growth rates projected for the following quarters), a substantial reduction in the average GDP growth rate by 2021 and, to a lesser extent, also from 2022.

Back on the first of this month we noted the 1.7% downwards revision ( from 2.8% to 1.1%) for GDP in Spain in the second quarter. The explanation of blaming global economic conditions is both partly true and convenient for an organisation whose forecasts now look rather ridiculous.

Second, there have been some changes in the global economic environment, which had been forging in past months and that in recent weeks they have charged a
Greater relevance. I am referring to alterations in global supply chains and the rising costs of some intermediate goods used in the processes productive activities and, in particular, energy (which, in addition, constitutes a very
important part of the household consumption basket). Together, these developments tend to point to a worsening of the global economic context.

The theme of emphasising issues abroad continued and along the way kindly confirmed my point that they still take note of the PMI business surveys.

In this context, it is illustrative that, according to the provisional estimate, Composite Euro production PMI fell by almost two points in October to the 54.3 level, which represents its lowest value in six months.

This is convenient in a presentation sense but to claim that the Euro area has solid growth right now as 54.3 suggests is in my view both wrong and misleading and in fact the Governor is about to give us some of the reasons why.

In Spain, the effect of mismatches in global supply chains has been already translated into a significant increase in order delivery times industrial, and, in some cases, in the need to reduce the rate of production, such as
consequence of the scarcity of raw materials and intermediate consumption. A case which is the most prominent is that of the automobile industry, one of the most affected by the shortage of semiconductors on a global scale.

Finally he gets there.

However, developments that I have described allow us to anticipate a significant downward revision of the growth of the current year in Spain. In fact, some analysts have already incorporated projections these latest developments.

Okay by how much then?

Thus, if the forecast panel is considered, which has a monthly frequency, it can be seen how in the
latest edition, published in mid-October, panelists have revised down by 0.5%, in the last month, its GDP growth forecast for this year.

So the tactic is to get the idea of growth slowing in their minds which you can use to deflect from your original forecast which now looks hopelessly wrong.


This is quite a mess for the Bank of Spain. It has joined in the ECB party claiming it will boost the economy but now finds itself having to admit this.

This increase has been transferred to the final prices paid by households and businesses, which compresses their real incomes and, therefore, affects negatively at the rate of recovery.

The inflation it has been trying to get is making Spanish consumers and workers poorer and thereby weakening the economy. No wonder it does not want to do a new formal growth forecast in the light and that and this.

In any case, the recovery of the activity is still clearly incomplete. The level of GDP in the second quarter still presented a gap of 8.4 pp compared to the
observed at the end of 2019. That gap was 2.5 pp in the euro area.

Maybe because this time around they have not been able to juice house prices like last time.

The annual variation rate of the Housing Price Index increased 2.4 points, standing at 3.3%.
Housing prices increased almost two and a half percentage points as compared with the previous quarter.

The latest quarter suggests they may be catching up but this in my opinion will only make things worse. The central bankers will talk about wealth effects. But the ordinary Spaniard faces a fall in living-standards and an economy that at best will stagnate and seems set to shrink again.


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