Inflation has become an annoying traveling companion to the ongoing recovery. The rise in prices in Spain, 3.3% in August compared to last year, had not been seen for almost a decade. The phenomenon is common to many other developed economies. Although prices have not accelerated as much as in the United States (5.4%), inflation has been beating the average of its European partners month after month, inflamed by one of the most expensive electricity bills on the continent. Its collateral effects are diverse, and if it lasts over time – something that central banks hope will not happen – they threaten to weigh down the Spanish economy by reducing purchasing power to public and private wage earners, damaging consumption, triggering the bill. of pensions and erode the competitiveness of companies.
Wages. A payroll of 950 euros per month in 14 payments – the current minimum wage in Spain – is not the same now as it was 12 months ago. With the price of gasoline 21% higher due to the rise in oil, and the electricity bill runaway due to the rise in gas prices and CO₂ emission rights, the margin for spending and saving – if any – is lower for those who perceive it. In the midst of the debate on the increase in the minimum wage by the Government, this has led the UGT union to propose that it increase at least at the same rate as inflation. Its position contrasts with that of the CEOE employers’ association, reluctant to any increase on the grounds that it could harm job creation.
But inflation is also sapping the purchasing power of other higher-paying employees. The wages agreed in the collective agreement grew by 1.54% until July, half of what prices increase. And in the main areas, salaries progressed less than inflation: they improved by 2.39% in construction, 1.51% in services, 1.37% in industry and 1.12% in agriculture. In the case of the nearly three million civil servants, the payroll is still further behind, and this year it grows 0.9%.
How wages adapt to rising inflation requires subtle balances. In the United States, there is a shortage of workers in certain sectors – which gives them greater bargaining power – and unemployment is falling sharply. That’s why Federal Reserve Chairman Jerome Powell said last week in Jackson Hole that he is monitoring the rate at which wages rise to avoid an eventual spiral in prices and wages, the movement that occurs when wages rise further. faster than productivity and in turn employers transfer the highest payroll spending to consumers, in a vicious cycle that feeds each other.
Pensions. The calculations of several analysis houses put the extra spending on pensions that the Government will have to undertake in 2022 due to the rise in inflation at about 4,900 million euros. Pensions are protected from price fluctuations: they go up as inflation goes up — and if inflation is negative, they don’t go down. This means that the effort of the public coffers is going to be greater than expected, since the Executive initially managed inflation forecasts for this year of 0.9% that have now been left on dead paper. Last year, the State allocated almost 119,000 million to this item, a figure that this year will increase significantly.
Consumption. If households spend more and more money on the electricity bill, filling the fuel tank, or shopping at the supermarket, savings accounts get thinner, and purchasing power decreases, which can reduce consumption. For Ignacio de la Torre, Arcano’s chief economist, this is a real threat. “The risk in Spain is that, although consumption is doing very well due to the improvement in confidence and the saving in storage, if the salaries according to the agreement rise by 1.5% and inflation doubles that level, this imbalance could be harmful to consumption ”, he explains. Something like this he believes happened in July in the United States, where wages are rising slower than prices and last month’s consumption data was disappointing.
Competitiveness. A factory that pays more for its electricity is less profitable, unless it transfers the increase to its products, and then it would be other companies or consumers who would bear the cost. But in the heat of globalization, raising the price is not even a guarantee that profit margins will be maintained. Competitiveness is fierce and customers can opt for cheaper options from countries with lower electricity bills or lower corporate taxes. High energy prices also discourage the arrival of new industries, which is not helping the recovery gain traction.
Monetary politics. Both the European Central Bank and the Federal Reserve have tweaked their targets and now tolerate inflation rates above 2%. Both insist that the rise in prices is a transitory phenomenon, encouraged by a host of factors that go beyond energy prices, such as problems in supply chains, huge public stimulus packages injected into the economy and the enormous demand caused by savings and public aid. De la Torre shares that idea. “In my opinion we will see two parallel processes: there will be lower inflation in 2022 as the base effect of comparing prices with the depressed levels of 2020 is corrected, and wages will rise due to the improvement in the working environment and incipient productivity improvements.”
However, the most orthodox sectors of both institutions —the so-called hawks– They take positions and increase the pressure to move: the Fed is already studying a reduction in stimulus before the end of the year. Europe, where core inflation —a metric for many more accurate to measure reality, in which energy and unprocessed food, the most volatile components, are not taken into account— is still low, at 0.7%, it will take more time to take the step of reducing asset purchases.
Public debt. Not all the effects of inflation are negative. “Inflation favors debtors more than creditors. And it makes public debt better digested, ”says Emilio Ontiveros, president of Analistas Financieros Internacionales (AFI). Spain is one of the most indebted countries in Europe, with a public debt of more than 120% of GDP. When inflation rises, state revenue also rises and helps GDP to grow, thus lowering the percentage of debt in relation to the size of the economy.