Just six months have passed since the VAT reduction that the Government approved for a group of basic foods due to the unprecedented increase in the price of the shopping basket, with a historical maximum of 16.7% year-on-year in February of this year.
The measure began to be applied on Monday, January 2, in the 19,000 stores and supermarkets in Spain to try to stop the escalation and was intended to last half a year, until this past June 30, although now it will be extended until the end of the year if the underlying does not decrease.
What has happened in supermarkets during this time? Economists and consumer associations agree that, indeed, the majority of businesses applied the tax exemption from its entry into force on selected foods and lowered prices, which gave a negative monthly CPI for various products in January.
VAT has been abolished on legumes, potatoes and tubers, milk, cheese, eggs, vegetables and fruit, cereals, bread and bread-making flour. This group of foods has gone from being taxed from 4% to 0%. Oil and pasta have cut their VAT from 10% to 5% and other foods, including meat or fish, keep the tax level intact and have no reduction.
However, starting in February, a new rise in prices is observed month by month in part of these products, highlights Antonio Luis Gallardo, head of studies at Asufin. The association of financial users has analyzed the cost of a shopping basket of 12 foods with reduced VAT in some of the main supermarket chains between January and June -see attached graph- and this is more expensive now than in January, when applied the exemption for the first time.
The CPI data per food consulted coincide with this trend. Bread, for example, closed January with negative inflation, of -0.2%, in the monthly comparison, according to information from the INE. In other words, after the VAT discount, this food was sold cheaper on the shelves than in December. Starting in February, on the other hand, the price rises month by month until May –the latest data available–, with the sole exception of April –zero inflation–.
Does this mean that the retailer has artificially inflated prices after the first VAT reduction? It does not have to be this way. The increase in costs that the food chain still drags -part of the inputs are purchased months in advance, hence the delay in transferring the variation in costs to the final price-, the reduction in harvests due to drought and the low supply in international food markets continue to push prices up, says Javier Ibáñez de Aldecoa, economist at CaixaBank Research.
“The measure has helped to combat inflation, which was experiencing a very rapid rise in food, although we have other forces to take into account,” he adds. The CPI for processed foods, although it continues to increase in the monthly rate, grows at a slower pace, up to 0.2% in May, a “more tolerable” increase in prices for the consumer, the economist points out.
Homero Cárdenas, an Afi analyst, highlights here that the inputs purchased last year by producers increased in price by almost 30%, well above the inflation of processed foods. Distribution sources also point to a certain difficulty when prices have to be renegotiated with food manufacturers.
“Some manufacturers prefer to lose sales volume rather than reduce their margins, and thus it is difficult to lower prices,” they lament. The analysis finalized by the National Commission for Markets and Competition (CNMC) on the application of the VAT reduction in stores will clarify this point.
The monthly rise in prices of certain foods also has no sign of being corrected. “We anticipate that the monthly rate of the CPI will not enter negative territory in the coming months,” estimates Ibáñez de Aldecoa, of Caixabank Research. And when this measure, which was born to be temporary, is eliminated, a slight rebound in inflation at the beginning of next year cannot be ruled out, continues Cárdenas, from Afi.
Stores could raise prices again as a result of the reintroduction of the usual level of taxes. Even so, the analyst estimates that the step effect “will be moderate, since we expect that by then food inflation will be at lower levels.”
All this despite the increased promotional activity that supermarkets have subscribed to in recent months to attract customers. Because, as distribution sources admit, a specific offer is one thing, no matter how attractive and aggressive it may be, and a general drop in prices is another: “What they discount on one side can be raised on the other.”
