Inflation strikes again

As if enough damage had not been done already by sluggish growth and the relentless decline in employment, the first months of 2011 are now seeing rising prices emerge as a threat to the weak economic situation, further eroding the purchasing power of the citizens who have so far kept their jobs.

According to the new indicator announced by Spain's National Statistics Institute (INE), inflation has increased (this will be confirmed in mid-February) by three-tenths of a percentage point in January, and now stands at an annual rate of 3.3 percent. The causes of this sharp, sudden upturn in prices are the recent hikes in the price of energy (electricity and fuel) and of food.

Fears of inflationary pressure are to be explained by the persistent pressure on prices of raw materials (metals and unprocessed foodstuffs) and of petroleum, with a barrel of Brent Crude hitting $100 on Monday. The crisis in Egypt and in other North African countries is also causing uneasiness in the markets, which will not cease until the political situation stabilizes.

But the fundamental factor in any understanding of rising raw materials prices (including oil) is that China is massively purchasing metals, grain and other products in the market to maintain its voracious growth rate. However, even China has its limits: growth at a rate of 10 percent annually implies very high rates of inflation which, probably, will oblige the Chinese government to cool the economy's growth. In which case, the pressure on raw material prices will tend to diminish.

There does exist, nonetheless, a certain risk that European growth rates which are more moderate than in the United States may coincide with an inflation rate of around two percent. This risk, very remote from the threat of a "stagflation" process, is not sufficient reason to justify a rise in interest rates. Inflation forecasts for the euro zone are for 1.7 percent this year, and 1.8 percent in 2012.

In the case of Spain, the forecasts show a maximum rate of inflation in February, and later a gradual decline of price pressure from March onward. The reasons are mainly statistical ones: the rise of the Consumer Price Index (CPI) in January reflects a comparison with rather low inflation in the first months of 2009. This year, too, prices will descend the gradient caused by last year's hike in value-added tax.

In any case, though it is admitted that the inflationary upturn will be a brief one, the government can do nothing about financial speculation and the crisis in North Africa, nor has it any capacity to limit Beijing's demand for raw materials; but it is able to exercise some control over the domestic markets. Spain's administration can and must modify the calculation procedure for electric power rates (after more than six years' delay); it can and must see to it that fuel distributors, who raise their prices in line with international quotations on petroleum products, reduce these prices when the oil price goes down; and it can and must act against the monopolies of distribution in foodstuff markets.