It has been just six months since the reduction in VAT that the Spanish Government approved for a group of basic foods due to the unprecedented increase in the price of the consumer basket, with a historical maximum of 16, 7% year-on-year in February this year. The measure began to be applied on Monday, January 2 in the 19,000 shops and supermarkets in Spain to try to slow the escalation and was intended to last half a year, until June 30, although it will now be extended until December 31 if the underlying does not decrease.
What has happened to the supermarkets during this time? Economists and consumer associations agree that, indeed, businesses have largely applied the tax exemption since its entry into force to selected foods and have lowered prices, which has resulted in a negative monthly CPI for several products in January VAT has been abolished on pulses, potatoes and tubers, milk, cheese, eggs, vegetables and fruit, cereals, bread and baking flour. This group of foods has been taxed from 4% to 0%. Oil and pasta have had their VAT cut from 10% to 5% and the rest of food, including meat and fish, keep the level of taxes intact and have no reduction.
However, starting from February a new month-on-month price increase has been observed in some of these products, points out Antonio Luis Gallardo, head of studies at Asufin. The association of financial users has analyzed the cost of a consumption basket of 12 foods with reduced VAT in some of the main supermarket chains between January and June – see the attached graph – and they are more expensive now than in January , when the exemption first applied.
The CPI data for food consulted coincides with this trend. Bread, for example, closed January with negative inflation, of -0.2%, in the monthly comparison, according to information from the INE. That is to say, that after the VAT discount, this food was sold in the stores cheaper than in December. From February, on the other hand, the price went up again month by month until May -latest available data-, with the only exception of April -zero inflation-. The same goes for eggs, one of the most inflationary foods in the last year. With a monthly CPI in January of -1.5%, in February they rebounded by 0.7%, with subsequent monthly increases until May. With olive oil, the same pattern: negative CPI in January compared to December (-1.2%), followed by successive increases (2.7% in February, 1.4% in March, 2.6% in April, 1.1% in May).
In the unprocessed food group – with more stable prices compared to fresh food – the monthly CPI has also been positive until May. In other words, these products have become a little more expensive every month.
Does this mean that distribution has artificially inflated prices after the first VAT cut? It doesn’t have to be like that. The increase in costs that still drags down the food chain – part of the inputs are bought months in advance, hence the delay in transferring the variation in costs to the final price -, the reduction in harvests for the drought and low supply in international food markets continue to push prices up, notes Javier Ibáñez de Aldecoa, CaixaBank Research economist. “The measure has contributed to combating inflation, which experienced a very rapid increase in food, although we have other forces that must be taken into account”, he adds. The CPI in processed food, although it continues to increase at a monthly rate, grows at a lower rate, up to 0.2% in May, a “more tolerable” price increase on the part of the consumer, the economist points out.
Homero Cárdenas, Afi analyst, points out 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 out a certain difficulty when it comes to renegotiating downward prices with food manufacturers. “Some manufacturers prefer to lose sales volume rather than reduce margins and the cost of lowering prices”, they lament. The analysis completed by the National Markets and Competition Commission (CNMC) on the application of the VAT reduction in shops will finally clarify this point.
Be that as it may, the feeling that remains among consumers six months after the tax exemption was established is that of “little savings”. “The measure has had a very limited impact on the domestic economy”, considers Antonio Luis Gallardo, of Asufin. An analysis by this newspaper comparing the price of a basket of ten basic products at Mercadona (distribution leader in Spain) between December 31 and January 2 gave a saving of 1.68 euros (from 39, 77 euros to 38.09 euros). Homero Cárdenas also points out that this is an “imperfect policy from a distributive point of view” (because it is a general measure that affects all citizens, regardless of income level).
The monthly price increase in certain foods also shows no sign of correcting itself. “We predict that the monthly rate of the CPI will not enter negative territory in the coming months”, estimates Ibáñez de Aldecoa, from Caixabank Research. And when this measure, which was born to be temporary, is removed, a slight rebound in inflation at the beginning of next year would not be ruled out, continues Cárdenas. Shops could raise prices again as a result of the reintroduction of the usual level of taxes. Nevertheless, the analyst estimates that the step effect “will be moderate, as we expect that food inflation will then be at lower levels”.
All this despite the greater promotional activity that supermarkets have practiced in recent months to attract customers. Because, as distribution sources admit, one thing is a one-off offer, no matter how attractive and aggressive it is, and another is a generalized drop in prices: “What you get discounted on one hand, they can raise on the other “.
