In the general calculation of the CPI (Consumer Price Index) of the National Institute of Statistics (INE), the absence of the price of electricity from the free market of electricity (contracts at the rates of trading companies) distorts the official inflation statistics. In particular, it will be a reassessment of the electricity tax relative to the rest of the shopping cart, based on various comparisons and approximations with Eurostat figures (EU INE).
This partial calculation, which takes into account only regulated market prices (in response to the more volatile daily production of electricity), has tangible results, beyond statistics. For example, it automatically switches to a revaluation of pensions related to the uncertain inflation of recent months, precisely because of the impact of the invasion of Ukraine on energy raw materials (gas or oil) and which may end the year on average. 7.5%, according to the latest forecast of the Bank of Spain.
There is a variety of evidence that allows us to conclude that the electricity bill currently adds more than is needed to the overall CPI. You still have to stop at the source of the distortion. INE’s current calculation includes a system-driven price exclusively for gas released to international markets in recent weeks due to the unrest of the war.
Then, compared to other data or other countries, there is an effect of excluding free market prices in the statistics, which INE itself has been trying to include for months, ”but we found problems with the information provided by the companies. We, ”the institution admits. The first announcement brought the inclusion of tariffs offered by electricity marketers in January 2022. Now, process-related sources are dragging it out until early 2023.
Thus, a comparison of weight in the overall CPI of electricity prices in all EU countries revealed that in Spain in February it reached 43% (see chart), just below Greece. Take a look at the Eurostat harmonized annual evolution data for the same month in 2021.
The overall CPI in Spain in February increased by 7.6% compared to the same month last year, while according to data provided by INE, it accelerated to 9.8% in March, although there will be details. Last month Unknown Wednesday, April 13th. As it is known, Spain was the European country in February, where the CPI increased the most only on electricity, 3.3%, this time Greece (3%) and the Netherlands (3%).
And to add evidence for the excessive effect of electricity due to its partial calculation of the overall CPI: the annual acceleration in electricity prices recorded in Spain in February, surprisingly 80.5%, is only in the Netherlands (94.4%) and Italy (81.9%).
If comparisons between countries go beyond that, economist Francisco Melissa, a former INE statistician, in this article published in elDiario.es presents a comparison of the Spanish Institute’s electricity CPI with the revenue data of companies in the sector collected. Eurostat. His conclusion is that “the increase in electricity in 2021 will be reduced to a third of what INE estimates.”
Melissa claims that “if the electricity index had increased by 13.3% in 2021, which is shown by Eurostat statistics instead of 35.6, in 2021 the overall index would have increased by 2.3% instead of the actually registered 1%.”
“Therefore, it can be said that the exclusion of the liberalized market in the electricity CPI increased inflation in Spain by 8 tenths,” he added. INE technicians argue this comparison “because it mixes the evolution of CPI prices with the revenue data for electricity companies from Eurostat.” That is, “in the latter, the price is disguised by a change in consumption, the capacity of the contract or the type of contract,” the institution continues.
Another major focus of the debate is the widely held position among various experts that contract renewals and free market tariffs for electricity marketers also reflect price increases, although they avoid this in the short term and this is happening. More volatile, giving a similar result to the year-on-year average inflation rate (CPI).
The truth is that the big challenge for the government today is to limit the price of gas in electricity generation. A joint proposal by Spain and Portugal, awaiting approval by the European Commission, aims to do so at 30 euros per megawatt. Economists agree that if this measure continues, “it will sink inflation.”
Incomplete statistics on the evolution of electricity prices from INE include higher government spending on pensions under the “€ 1,500 million for each additional point of inflation” equation recently published by the Independent Fiscal Responsibility Authority. (AIReF) – If the thesis suggests that the electricity bill is currently adding more than it should to the overall CPI.
It will also affect the renewal of housing rent, which is actually limited to 2% in the government’s war response plan by June, or the revision of wage-related wage agreements, although they only amount to 15%.
The distortion of the CPI at this historic peak in the price of electricity then has an impact on various areas of real economic activity. The increase in pension spending is most serious in terms of its amount and vulnerability to public accounts.
According to the AIReF itself, the deficit of public administrations (the difference between expenditures and revenues, which must be corrected by debt) will remain at 4.2% of GDP in 2022. And the big threat is that of trying to revalue pensions in 2023. This year’s CPI will halt the reduction in this deficit, which grew to 10.3% of GDP in 2020 due to the Covid crisis.
“The decision to renew current pensions at any time will have significant consequences for last year’s total government spending on pensions,” warns URJC Professor Miguel Angel Garcia in a report published by Fedea.
“According to available information, by the end of 2022, state spending on pensions may exceed 174,000 million euros. “This amounts to 13.6% of GDP on pensions, which is 1.3 points more than before the pandemic,” said the regrettable economist. That “the outlook for 2023 is not very favorable at the moment.”
“By 6% of the average annual inflation of 2022, taking into account the possibility of a positive impact of the measures taken. To this must be added the impact of a larger number of pensions (1.1%) and a replacement effect. Higher amount of new pensions compared to those leaving the system (1.3%). The sum of the three effects implies an 8.4% increase in pension spending in 2023, ”he concludes.
Source: El Diario
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