CPI: Inflation soars in March to 9.8%, the highest since 1985, due to the war in Ukraine | Economy

The first month of war in Ukraine has had a notable impact on prices. Inflation rose 9.8% in March compared to last year, according to advance data from the National Institute of Statistics, compared to 7.6% in February. It is the highest figure since May 1985. All the predictions pointed to the rise in gas and oil prices on international markets after the sanctions against Russia, one of the world’s largest producers of both raw materials, and its subsequent reflection on the electric bill and the cost of filling the fuel tank, would force us to go back even further in the calendar to find precedents. And so it has been. Its evolution in the coming months will depend to a large extent on the peace negotiations: the advances in Tuesday’s meeting have revived hopes of an agreement that will stop the high human cost of the conflict and curb the global escalation of prices, but the uncertainty remains high. Core inflation, which discounts the evolution of the most volatile components, such as energy or fresh food, rose four tenths to 3.4%.

It had been almost 37 years since these price increases had occurred in Spain. And the persistence of the phenomenon, which melts the volume of savings as if it were an ice cube in the sun, is exceeding all expectations, regardless of the fact that the hypothesis of a military conflict in Europe did not appear in them. The Ministry of Economic Affairs has detailed that 73% of the price increase is due to the impact of the invasion of Ukraine on the prices of energy and unprocessed food, and sees it as urgent “to reverse this upward trend” to deploy the aid package 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 that comes into force this Friday.

The Consumer Price Index (CPI) is just one year above the 2% target of the European Central Bank, dragged by two forces that act as fuel for the inflationary bonfire: on the one hand, a buoyant demand due to the economic rebound encouraged by public stimuli, the end of restrictions and the exit of savings accumulated in the pandemic. And on the other, a limping offer, weighed down by multiple setbacks.

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. And it is not just an energy setback. Almost everything that could go wrong has gone wrong. Domestically, the transport strike has reduced supply and strained the supply chains of numerous companies and industries, which favors inflation. And on the international flank, the confinement of Shenzhen – the most important technological hub in China -, Shanghai – the most populous city – and other cities, within the strict covid-zero strategy launched by Beijing, have generated new logistical imbalances and delays. in deliveries due to the closure of factories and the obligation of truck drivers to undergo tests in order to work. Paradoxically, the closures drive an opposite trend that struggles with the rest: the more restrictions, the less oil consumption, which has led to occasional drops in its price due to a possible slowdown in Chinese demand.

Global trade does not bring good news either. If the truckers’ strike has exhibited the destructive capacity for the economy of a halt in road transport, in the oceans the high rates of maritime transport, responsible for more than 80% of global trade, are of concern. A study by the Monetary Fund published this Monday indicates that the inflationary impact of high freight rates – which is usually transferred to prices with a delay – will continue to increase until the end of this year. “The increase in shipping costs observed in 2021 could increase inflation by approximately 1.5 percentage points in 2022,” the agency calculates.

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The IMF is pessimistic about an early resolution of the problem. The war in Ukraine is likely to cause further disruptions to supply chains, which could keep global shipping costs, and their inflationary effects, higher for longer. That means two things: fresh money for the booming bottom lines of shipping companies, immersed in a golden age that is only getting longer. And more expensive merchandise for the rest.

In addition, the invasion undertaken by Vladimir Putin has triggered the price of metals such as nickel, essential for the production of electric batteries, because Russia, the third largest producer in the world, is now an isolated country with which the West refuses to do business. The same happens with the fertilizers previously imported from Russia that are needed for the crops. And with the dependence on the harvests of the Ukraine, from where Spain and Europe brought a good part of the wheat and corn necessary for feed, the lack of which has made feeding the cattle more expensive.

On the energy side, the comparisons are clarifying. The liter of gasoline already hit record highs on January 31 with 1,538 euros per liter, but it did not stop there, and in the middle of this month it reached 1,845 euros after chaining three months of increases. The explanation lies in the meteoric rise in the price of crude oil, which began the year below 80 dollars and has spent almost the entire month of March above the 100 dollar barrier —with peaks close to 140 dollars—. The average price of electricity has also exceeded that of February. If last month it was 200.23 euros per megawatt hour in the wholesale market, in March all records were broken, with a historical maximum of 545 euros on the 7th. The higher production costs are already causing price increases significant in food and other products in the shopping basket that were initially resisting better.

A security guard dressed in protective gear orders a woman to go home for quarantine in Shanghai on Tuesday.
A security guard dressed in protective gear orders a woman to go home for quarantine in Shanghai on Tuesday.ALEX PLAVEVSKI (EFE)

A turning point that does not come

In a war-free environment, this month was bound to be a turning point in inflation. In March 2021, prices rose by 1.3%, with which it was expected that the comparison effect would begin to deflate rates, and that the trend would continue for the rest of the year. This has not been the case because the war has acted as a price accelerator that has crushed all forecasts in record time, although there are analysts who see the ceiling as close. “We do not expect much higher rates. The impact of the slowdown in demand due to the lower purchasing power of consumers will reduce inflation”, ING experts predict.

The logic behind this thesis is overwhelming: the money that consumers use to pay electricity bills and travel by car is money that is not used to go to the restaurant or consume other things. Before this decline in purchases, however, heights unthinkable not so long ago can be reached. “Don’t be surprised if the peak of inflation in the euro zone reaches double digits in the coming months, before returning to the downward trend”, add the analysts of the Dutch bank.

Spanish inflation has been remaining slightly below that of the US month after month, but almost two points above that of its European partners. Wages are not following this movement, which is causing a general loss of purchasing power. For the ECB, this has a positive side, by avoiding the price spiral that Frankfurt fears so much: if wages go up too much, companies’ costs do too, leading them to raise prices to improve margins. Perceiving this increase, employees ask again for increases to protect themselves from the cost of living. And so over and over again, in the worst case scenario, they would continue to feed each other out of control. The ECB, increasingly under pressure to withdraw stimulus, does not expect that to happen, predicting that in 2023 and 2024 European inflation will return to more normal levels and hover around 2%.

A peace agreement that ends the war as soon as possible would pave that way back. As will the return to work of most carriers after the agreement of the main employers with the Government, the subsidy of 20 cents on fuel for all citizens from April 1 approved by the Executive, and the extension until June 30 of the tax reduction on the electricity bill.

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