The inflation data for March that will be published at the end of this month will have something of a trompe l’oeil, the pictorial technique that deceives the eye by playing with the environment. In this case there is no intentional deception, but a piece of information will appear that must be placed in the proper perspective so as not to believe, as in some paintings, that the figures protrude from the wall.
What is taken for granted is that inflation will suffer a spectacular drop in March, but basically it will be due to a statistical effect; much more than by a real moderation of the rise in prices. Forecasts place it slightly above 3% (CaixaBank Research sets it at 3.2%) when we come from 6.1% in February.
The reason is to be found in the spectacular increase in energy and especially electricity in March of last year, which was the first full month of impact of the invasion of Ukraine. Since the formula most used to analyze the behavior of prices is the interannual CPI, the effect is distorting. By the very definition of the interannual CPI, inflation depends on the value of the CPI in the month in question, but also on the value of the CPI 12 months ago, the “starting base” value. When comparing the same month of two years, the so-called “base effect” occurs.
In the coming months this effect is especially decisive. An analysis by CaixaBanck Research carried out by Oriol Carreras and Javier Ibáñez indicates that “the base effect will exert significant downward pressure on inflation throughout the first half of 2023” and shows the variation in the impact of this base effect, which will be very pronounced in March and June, and less in April and May.
Everything depends to a large extent on what happened in these months last year. The article analyzes in detail (see attached graph) the month of June of this year, where it is verified that despite the fact that the CPI level is expected to grow by 3.5% between January and June 2023, inflation will drop to 3% in June. If the index grows between January and June, how can inflation fall? Well, for the comparison with the CPI for the same month a year earlier, when it was 6.5%.
“The validity of the general CPI is going to be relative in the coming months. Not only in March, but throughout the year, especially in the first semester,” says Javier Ibáñez, from CaixaBank Research, and recommends paying more attention to core inflation, which does not include energy and fresh food, and which is much less volatile. . An underlying located at a very high 7.7% in February and which will have a hard time going down. “General inflation is always subject to these types of elements. Very volatile components, such as energy, have a lot of weight. It is always volatile, but now much more,” says María Jesús Fernández, from Funcas, who adds that “the underlying is what reveals the underlying inflationary tensions in the economy.”
In recent months, more and more attention has been paid to core inflation, which began its rise much later than the general, but which will also find it much more difficult to moderate. At the moment, it has been three months above the general.
Another alternative is inter-monthly inflation, the comparison with the previous month, but in this case, it must be taken into account that it is very seasonal, with marked variations depending on the time of year.
For now, the final inflation data for February will be released tomorrow, with less impact from the base effect, and it will be verified if the increase of two tenths of the interannual rate that left it at 6.1% is confirmed, according to the advanced data. And in the longer term, CaixaBank Research forecasts that inflation will moderate in the coming months, but that it will be more due to the base effect, than due to a substantial moderation in the monthly growth rate of the CPI during 2023.
