The global environment continues to be marked by growing inflationary pressures, which project higher price growth this year than initially estimated by the main international organizations and central banks. Thus, together with the normalization of value and supply chains, the evolution of the first energy crisis, framed within the decarbonization process, facing the world will be key to determining the final structural impact on inflation in the medium term.
At this juncture, average inflation in OECD countries as a whole continues its upward path initiated since the end of 2020. Specifically, in August it rose to 4.3% year-on-year. This trend is mainly explained by the significant rise in the cost of energy of 18.0% year-on-year, its highest increase since September 2008, which has been driven by the sharp increase in the price of crude oil, natural gas and coal. The price of Dutch natural gas (the benchmark in Europe) has risen by around 500% since the beginning of the year, and Brent crude by approximately 60%.
At the same time, food prices accelerated by 3.6% year-on-year, compared to 3.1% last July, also driven by the rise in the price of its main raw materials and the cost of transporting goods, among other factors.
Thus, the increase in demand, driven by the reopening of economies and the savings that households have been saving since the beginning of the pandemic, together with the persistence of supply shocks, have placed inflation in the Eurozone and the US at its highest levels since 2008.
In the case of the Eurozone, inflation in Germany and Spain was above the overall Eurozone of 3.0% y/y in August. A trend which, according to the preliminary CPI reading for September, has accentuated, widening the differential with respect to France and Italy, which could negatively condition the competitiveness of the Spanish economy if it persists in the short term. In this sense, the current dynamics of the price level in our country, together with the downward revision of production growth in the second quarter, could reduce Spanish GDP growth to 5.5% annually this year, as indicated by the IMF, which projects 5.7%.
A situation in which the combination of a lower base effect compared to the same period of the previous year and the upward trend in energy prices suggest a sustained increase in the price level in the coming months. Thus, inflation in the Eurozone could reach an annual rate of 4.0% at the end of this year, after Eurostat’s first estimate of 3.4% in September.
Hence, the evolution of core inflation, excluding unprocessed food and energy, will be decisive in determining the structural nature of the current inflationary pressures. This will be conditioned by the duration of the bottlenecks in the value and supply chains and the health crisis, and the percentage of companies that are forced to pass on the increase in production costs to final prices.
The current energy crisis is therefore one of the main risks that could weigh on the dynamism of the recovery, not only because of its impact in terms of loss of disposable income and corporate profits but also because it could accelerate second-round inflationary effects.
A combination of factors that make the thesis that we are witnessing a transitory upturn in the price level lose strength, and that could lead us to a scenario marked by higher and more prolonged inflation. All this in an environment in which it is necessary to evaluate the effects of the decarbonization process, which could generate an increase in prices for end consumers of between 1% and 4% in the medium term, according to a recent report by the Boston Consulting Group and the WEF.