A joint proposal by Spain and Portugal to a maximum price of 30 euros per megawatt hour (MWh) to reduce electricity prices will “sink” inflation, experts agree. This limit on the price of gas burned by combined cycle plants, within the framework of the “Iberian Exception” mechanism agreed by the Council of Europe last week, must be approved by the European Commission and will have “a very significant and automatic impact. CPI (Consumer Price Index) ”and the current price escalation, said Ignacio Conde-Ruiz, UCM Professor and Deputy Director of Fedea.
This Wednesday, March March inflation data rose to 9.85% from the same month in 2021, a record high since 1985. The government was quick to argue that “73%” of the price escalation was caused by energy costs. The impact of the Ukrainian invasion on international markets.
Among the executive’s defenders, both First Vice President and Economy Minister Nadia Calvino and President Pedro Sanchez have repeatedly stressed “limiting the price of gas electricity generation”, which was also approved on Tuesday as a priority in the war impact response plan.
A team of experts from the Funcas Analysis Center had already estimated this Wednesday, without knowing the proposal on gas, that this shocking plan would reduce headline inflation by about one percentage point, which they estimated at 6.8% for the whole of 2022.
With a limit of 30 euros per megawatt for gas, the impact will be even greater. If the European Commission agrees, “the price of gas will fall in the second half of the year on an annual basis, due to a more than 100% increase in current prices. The result: an collapse in inflation,” said Angel Talavera, head. European Economist at Oxford Economics.
The main thing is that the prices of “electricity, gas and other fuels” started to accelerate in April 2021, which is much higher than the rest of the basket of goods and services, by which the General Institute of Statistics (INE) calculates the overall CPI (see chart).
24.7% in April last year, 25.5% in May … Annual data, which is explained by the collapse of 2020, in the months of the “Great Lock”, during which there was practically no demand and so on. They were absorbed in the rest of the goods and services, always under the definition of transient shock.
But October data already warned of a global supply disruption (currently exacerbated by Russia’s invasion of Ukraine): the “electricity, gas and other fuels” sub-index rose by almost 50% and automatically switched to the general CPI, which. After not falling below 5% for a month in a year, up to 7.6% in February, 60% in energy and up to 10% in March.
Higher transmissions of energy expenditures to the overall CPI than to the rest of the euro area (for a variety of reasons) and the specific impact of road closures on basic foodstuffs (such as milk or bread) have dramatically widened the gap between headline inflation. March, 9.8%, while core CPI, 3.4%. The latter precisely excludes energy and unprocessed food (the most volatile elements of the shopping cart) from the calculation. With the gas price limit, this gap will be narrowed, at the same time core inflation will fall.
This baseline effect, i.e. the observation from which the 2021 data accelerates the CPI from 2022 onwards, has already served to escalate inflation in the coming months, even without a gas limit. Although the annual index for February 2021 was slightly negative – compared to 2020, in March last year it increased by 1.2%.
In April 2021 it has already jumped to 2.2%, in May to 2.7%, as well as in June last year. This means that the data for the coming months of 2022 already start with high inflation rates that continued to grow in the second half of the year, especially with the first energy peaks slowing down this year in relative terms, respectively. Forecasts by experts and the government.
Source: El Diario
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