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Economy in Brief

Spain's CPI Headline Inflation Rises As Its Core Cools; Headline +0.5%; Core +0.1%
by Robert Brusca  September 14, 2021

Spain is a good example of European inflation, as its headline pushes strongly higher but the core (ex-energy here) remains ensconced at a pace that the central bank could continue to love, running below one percent year-on-year and showing acceleration that over three months (annualized) is still below the 2% mark. Compare this to the U.S. where in August the headline CPI is at 5.3% and the core over 12 months is at 4.0%. Spain is on easy street compared to the U.S. based on headline inflation. Spain's short-term inflation progression also is cruising at a sustainable speed based on the core (or ex-energy pace, stuck below 2% in Spain) ...unlike in the U.S. where the year-on-year pace is high, and three-month and six-month inflation rates are even higher. Are global inflation trends beginning to diverge?

Spain's inflation trends
A year ago, inflation in Spain (by that I mean the year-on-year pace) was at -0.6% according to the HICP and -0.5% according to the CPI with the CPI ex-energy running at a 0.5% pace- stronger than the headline but still at a very moderate pace. By comparison today the HICP is up to a 3.3% pace, the CPI is at 3.3% as well with the ex-energy CPI at 0.7% barely higher at all year-on-year compared to its 12-month-ago pace. Yet, headline inflation has accelerated by almost FOUR full percentage points {3.3 - (-0.6) = 3.9}.

So, the ex-energy component of the CPI/HICP seems to have played an important role in sending a consistent and correct signal to monetary policy makers in Europe based on Spain (where inflation has tracked EMU-wide inflation in this period). During this time of some considerable economic duress and of inflation acceleration and distortion, the core has been a beacon. And the inflation distortion period is not over yet.

Inflation and diffusion signals
Still, diffusion calculations for Spain are mostly subdued relative to what has been going on. Twelve-month inflation compared to the pace of 12-months ago shows this substantial acceleration. But diffusion, that compares inflation rates as being higher or lower by category (a binary response) in the two periods shows diffusion of ‘just' 63.6%. That proportion is above 50% so inflation is accelerating in more categories than it is decelerating but with such a high headline pace and strong acceleration, that diffusion reading actually is reassuring ‘mild.' Over six months, however, diffusion has a more alarming reading at 81.8%. That shows inflation accelerating in about 80% of the categories vs. falling in only about 20% of them. And not surprisingly, the pace for inflation over six months is all the way up to 5.2%. If we go back to look at what inflation was doing six-months ago, the answer is that it was rising at a 1.5% annual rate (not in the table), so the headline acceleration is 3.7 points nearly the same gap as for year-over-year inflation compared to one year ago – but with a much higher diffusion reading.

The six-month diffusion reading would be more alarming if over three-months diffusion did not drop back to 54.5% -although remembering how these diffusion statistics are calculated we are comparing inflation over three months with inflation over six months when it flared so badly (5.2% with diffusion at 81.8%). So, should we be assuaged by the three-month step down?

The answer, of course, is ‘it depends or ‘not necessarily. And what I mean by that is that when you compare inflation rates to clearly excessive rates there is a lot of room for inflation to be reduced in the comparison period and still to be excessive. Alternatively, inflation could be so greatly reduced on the comparison that it really has migrated to a calm pace. The higher vs. lower comparisons are not all that instructive in such a case, at least not by themselves. Here we can go to the monthly data for guidance.

Monthly patterns
Monthly data show the month-to-month gain for headline inflation at 0.1% to 0.2% in July and at 0.5% on both the HICP and domestic CPI measures in August. Ex-energy inflation is 0.2% month-to-month in July and only 0.1% in August. Moving on to the diffusion data, they show diffusion of 45.5% in July and at 54.5% in August. One shows mild deflation the other indicates mild inflation. In short, the monthly data do not show a continuation of the six-month pace for inflation - or anything like it. Over two months the ex-energy pace is at an annual rate of 1.8% and over three months it is at a pace of 1.5%. The core continues to weather this period in fine shape throwing off consistent signals of moderate inflation.

Europe makes different sorts of progress
Unlike the U.S., Europe appears to have weathered its inflation problem with less stress. Not only that but in the U.K. employment levels today are reported to be back above pre-Covid levels and this is for a country that is also dealing with the transition of Brexit.

Spain tames inflation
Spain's inflation shows a real taming of the inflation shrew. Spain is a country that had persistently fought an inflation problem before it joined the EMU and even well into its EMU integration. It still struggles with structurally high unemployment. But in the post financial crisis period, Spain has done a very good job in controlling inflation. It is very good news indeed to see that Spain can endure a period of inflation ramping up without that getting ingrained in expectations so that it cannot come back down. Inflation in Spain has indeed come back down and seems to still be in a moderate trajectory judging from the core pace. Spanish macroeconomic policy still has a lot on its plate if it is to conquer its unemployment problem. But it seems that… when it comes to inflation: the terror reign in Spain is simply on the wane. I'll leave you with that.

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