The current scenario inflation triggered threatens the pockets of consumers and narrows the margins of companies. Central banks are determined to use all policy tools to control rising prices. But those rate hikes they are frightening and the perfect storm from which nobody knows how we are going to get out of threatens to ruin the recovery after the pandemic causing a stagnation of the economy or even a dreaded recession in the next years.
The European Central Bank decided at its last meeting to adopt a 0.25% rate hike in July – the first rate hike in eleven years – and is likely to raise another 0.50% in September to re-assess the situation later. The Federal Reserve US (Fed), meanwhile, raised rates by 0.75%. And it does not seem that they are going to be the last, but rather the expectation is that both organizations will continue to raise rates. “We will go as far as necessary,” European Central Bank (ECB) President Christine Lagarde said last Tuesday to ensure that inflation stabilizes in the medium term at the 2% target.
But how will this affect growth? At the moment, the General Council of Economists (CGE) maintains at 3.9% its forecasts for the growth of the Gross Domestic Product (GDP) Spanish this year and leaves the average annual rate of the Consumer Price Index (CPI) at 7.1%. However, it is noted that GDP growth of 0.2% in the first quarter indicates that the country is witnessing a slowdown. For the eurozone as a whole, the ECB expects 2.8% growth, although it could be revised downwards.
The fight against inflation will be the main battle horse for central banks in the coming months. In Spain, prices have risen 10.2% in June compared to the same month of the previous year. The data advanced this week by the Statistics National Institute (INE), the highest in 37 years, shows that the increase in the price of products and services continues to grow at a strong rate and that it continues to be transferred to the rest of the shopping basket. Without taking into account the electricity nor food, the products most conditioned by energy, prices have increased by 5.5%, which would mean the highest level since August 1993.
The Government, for its part, defends that without the measures it has taken so far, such as the gas cap or the subsidy of 20 cents per liter of fuel, inflation would be 15%. The President of the Executive, Pedro Sánchez, made an effort this week to attribute the skyrocketing rise in prices “by two thirds” to the ukrainian war.
“It is to be expected that with the sharp rises in inflation in 2021 and 2022, this loss of purchasing power and its negative consequences both at the household level (impoverishment) and at the macroeconomic level (fall in consumption, activity and increase in indebtedness ) go further. It is urgent to adopt measures in the labor and economic field to recover the purchasing power lost by wages and prevent that loss from going further “, they emphasize from the union that directs unai deaf.
In this sense, experts warn of the possibility of entering a dangerous spiral of generalized fall in consumption, marked by the particular international context. The ukrainian war It does not seem to end quickly, but it is most likely that the war started by Russia will drag on over time with the repercussions it is already having on energy prices and raw Materials. This will continue to push up production costs, which can then be transferred to product prices.
In all this context, the business sector sees the position adopted by the unions in the next salary and agreement negotiations as a real danger, due to its repercussion on the competitiveness. “Despite the measures implemented by the Government since 2018, where the increases in the Minimum Interprofessional Salary (SMI), the data shows that at least until 2020 they have not been able to reverse the significant loss of purchasing power that wages accumulate for doing the same job, “says the Workers’ Commissions union.
But one cannot lose sight of the issue of pensions, with a revaluation difficult to comply with by the Government. Brussels has a magnifying glass on the calculations of the Spanish Executive, which intends to raise them in 2023 taking as a reference the average CPI registered between December 2021 and November 2022. This will mean an increase in public spending of at least 16,000 million, according to the calculations of Bank of Spain.
But the rise in prices recorded in Spain also extends to the entire European Union. The advance data for June of the Consumer Price Index (CPI) shot up again by 8.6%, marking a new all-time high and exceeding market expectations after 8.1% in May.
The uncertainty, therefore, is maximum at a global geopolitical context which already points to a bipolar configuration that will probably be led by commercial closures, the paralysis of foreign trade and the end of markets with cheap labor. The long-term scenario could ultimately be one of lower growth and sustained inflationary pressures.
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