Why inflation is so low in Spain

Fish seller in Barcelona

Core inflation remains high in Spain.

(Photo: Bloomberg)

Madrid Many EU countries are likely to look at Spain with envy. Because inflation there is now significantly lower than the EU average and was just 3.2 percent in May. In Germany, it was almost twice as high at 6.1 percent, although it has already fallen significantly here as well. In France, too, it is still six percent after a significant decline.

However, Spain has no panacea for fighting inflation to follow. “The reason for the significantly lower rate in Spain lies primarily in the falling prices for electricity and gas,” says Juan Carlos Martínez Lázaro, an economist at the private IE University in Madrid.

This is shown by looking at core inflation, which excludes volatile prices for energy and fresh food. In Spain it is 6.1 percent, higher than the eurozone average of 5.6 percent.

Energy prices are falling everywhere at the moment. But in Spain, the decline is particularly large for three reasons. On the one hand, the country was able to use a particularly large amount of renewable energy during its sunny and hot spring, which is comparatively cheap.

“In the central hours of the day, from 11 a.m. to 6 p.m., Spain was able to cover its entire energy needs with renewables – especially with sun and wind,” explains Lázaro. Some energy companies are already warning of overcapacities and criticize that they can no longer produce profitably due to the cheap prices of renewables.

Lower energy prices lower inflation in Spain more than anywhere else

Secondly, the Iberian gas price cap has been in force in Spain and Portugal since June 2022. It sets an artificial upper limit of an average of 50 euros per megawatt hour for the gas used to produce electricity.

On the spot market, on the other hand, gas sometimes cost a multiple of that. In the meantime, however, the market price is sometimes even below 50 euros, so the Iberian gas price cap is no longer used permanently.

But it is precisely the low market prices for gas and electricity that have a much stronger effect in Spain than in other countries – this is the third reason for the low inflation rate. The national Spanish statistics institute uses only the so-called regulated tariff for the calculation of the electricity costs, the amount of which corresponds one to one to the prices on the spot market.

This means that falling market prices for energy are immediately reflected in lower electricity prices in Spain – even though only 40 percent of Spanish households and 70 percent of companies are affected by this regulated electricity tariff. The rest is currently irrelevant when calculating electricity prices.

Madrid’s anti-inflation measures are having little effect

The statistics institute wants to change that in the future. After all, the distortions in this calculation work in both directions: when energy prices were particularly high shortly after the start of the Ukraine war, this had the opposite effect for Spain.

>> Read here: Inflation in the euro zone falls more than expected in May

Inflation rose much earlier and faster there than in the rest of Europe at the time. Madrid therefore spoke out vehemently in Brussels for the Iberian gas price cap and later for a reform of the European electricity market design.

The Spanish government has also taken other measures to keep inflation in check. For example, Spaniards can still use local public transport for free, VAT on basic foods is currently suspended, and taxes on energy are reduced. “Overall, however, this only had a minor effect on the inflation rate,” says economist Lázaro. “The most important effect is the lower gas and electricity prices.”

More: Gas price cap lowers inflation in Spain – but also has negative effects

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