The good news is that inflation has entered the control zone, with a scenario of moderation ahead. The not so good thing is that the process will be slow, and that during this year we will continue at relatively high levels. A CaixaBank Research report calculates that the average CPI in 2024 will be around 3%, half a point below the previous year, and that it will take two years to reach the 2% always desired by the European Central Bank more, until 2026.
“This year it is food and energy that will limit price moderation”, says Zoel MartÃn, author of the report InflaciON, inflaciOFF: perspectives for 2024. Or to be more precise, the limit will come from the price of foods that, although slowing their rises, will continue at high levels; and a progressive withdrawal of tax subsidies that will cause energy prices to rise. One hint supporting this forecast is that core inflation, which excludes energy and fresh food, would eventually come in below headline inflation, pointing to the real culprits in keeping prices from falling further. The forecast is that this rate, less volatile and more reliable of fund trends, will remain at an average of 2.7%
With regard to food, if the average inflation last year was a very high 11.1%, this year it would be 3.8%. The rise is slowing down, but the rise continues, which is why a visit to the supermarket will continue to be painful over the coming months.
Although the rampant escalation of food prices already began in 2022, last year was the consolidation reaching the ceiling (over 16% year-on-year in February and March) and maintaining most of the months above 10%. Now it’s time for a break, with the stabilization of these prices in February, which is expected to continue to moderate.
A moderation that is largely explained by the so-called base effect. Given that prices were so high last year, a significant brake is expected when establishing the year-on-year comparison. In addition, a reduction in agricultural costs, which have had a negative year-on-year rate of change for several months, will also play a role, which should ease the pressure on food prices.
In energy prices, what will be noticed is the impact of the progressive return of taxation. It is something that was already appreciated in January, with a rise of three tens due to the withdrawal of the first aid, such as a VAT on electricity that rose from 5 to 10%, the tax on the value of production which was suspended and went to 3.5%, and the special tax on electricity, which went from 0.5% to 2.5%. There are other increases in sight, one of which is that of this special tax on electricity, which will go up again in June.
Without forgetting what has been erected as the surprise of February, a sharp drop in the wholesale price of electricity. Good news without a doubt, but with a derivative, the increase from this March in the VAT on light from 10 to 21%, since the wholesale price has fallen below 45 euros/MWh.
The truth is that energy prices will remain contained this year, both for fuel, with the Brent barrel at an average of $79, and for electricity. However, in this case, as we mentioned, it will be offset by the scheduled tax increases.
“As far as underlying inflation is concerned, we are optimistic”, adds economist Zoel MartÃn. The reasons are that they foresee that the transmission of the impact of energy and food to the hard core of inflation has already been exhausted, that the general indexes of industrial prices have been in negative territory for months and, in more, which rule out second-round effects due to wages, whose increase has stabilized at around 4% year-on-year.
