The price moderation process in Spain is slow but sure. This has been confirmed by the February data. After the rise in the first month of the year, this month inflation moderated again and stood at 2.8%, a reduction of six tenths. In this way, prices are placed below the 3% barrier for the first time in the last six months.
Two elements are involved in this moderation. On the one hand, the drop in electricity prices; and on the other, that food has remained stable. This has its impact because in February of last year food experienced a large increase.
In January, the partial withdrawal of anti-inflation aid was predictably paid for, an indispensable measure because the return to the rules of fiscal discipline requires the correction of public accounts burdened with heavy debt. This led to an increase of three tenths of inflation. But now in February the good news has arrived with electricity, with a drop in prices that has played an important role in this brake on inflation.
In the wholesale market, the price of electricity this month has averaged 40 euros/MWh, much lower both than its level in February 2023 and also below the prices of January this year. The reasons for the drop in electricity prices are to be found in a reduction in electricity demand and in a greater generation of cheaper renewable energies. In addition, the large production of wind energy, which is cheaper, has also contributed.
Another of the elements that explain the moderation of prices is the very prominent step effect of food. It should be borne in mind that in February 2023 food prices rose a lot, to the point of reaching their maximum, an increase of over 16%. Therefore, after having stabilized in February this year, the comparison leads to a moderation of inflation.
It is true that, despite this moderation, food prices remain high and that last month they even rose by a tenth, to 7.4%. It is one of the elements that has punished the consumer the most in recent months, the prices he had to pay when he went to the supermarket. If there was a scare in January, the advanced CPI data provided by the INE this Thursday indicates that they will stabilize in February.
In this way, inflation is at the lowest level since August, when it stood at 2.6%. In September it climbed and for the last five months it has always been above 3%, until now, in February, when it dropped to 2.8%.
“With the sharp fall in the price of electricity, we expected inflation to fall even further and remain below this 2.8%”, points out María Jesús Fernández, from Funcas, who calculated that at this rate it would get there simply because of the cascade effect with food, so with the push from wind power this February the CPI could slow down more.
On the other hand, underlying inflation, which does not take into account energy or fresh food, was reduced by two tenths, to 3.4%, the lowest in the last two years. The moderation of this indicator, which is considered to represent underlying trends well, as it is less volatile, therefore continues. “It is good news, the underlying continues its downward march, even if it is a somewhat slow process”, affirms Fernández.
For the Ministry of Economy, these data show that “households are being allowed to regain purchasing power and companies to regain competitiveness”, and they also add that they show that price moderation is compatible with the social shield.
For March, it is predictable that inflation will rise again, and the reason will be the increase in VAT on electricity due to this surprisingly rapid fall in the cost of electricity. From this Friday, electricity will be taxed with a VAT of 21% compared to the 10% set by the Spanish Government at the beginning of the year. This return earlier than expected to the usual taxation of light is due to the fact that the decision of the Executive was to set the VAT at 10%, but conditional on the fact that the price of the megawatt hour ( MWh) in the wholesale market remained above 45 euros. Since this month the price is on average 40 euros, therefore below the set limit, the VAT will have to be raised to the usual 21%.
It is an automatic application of the VAT rate based on electricity prices, and if they were to increase and exceed 45 euros again, the VAT would also return to 10%. However, it is not the forecast, the calculation is that electricity will continue at reduced prices in the coming months.
In comparison with European countries, this month Spain has the lowest prices, together with Portugal. They are 40 euros/MWh for Germany’s 61 or Italy’s 87 euros.
