Thursday, June 26, 2008

Producer Prices Continue to Maintain Pressure on the Spanish CPI

According to the National Statistics Institute (INE), Spain's Producer Price Index registered a year on year increase of 7.9% in May 2008. The activities that most influenced this increase were the manufacture of coke and refined petroleum products (39.9%) and food and beverage products (10.3%). In terms of the final destination of the goods, the variation rates as compared with the same month the previous year were 5.3% for consumer goods (3.3% for durable consumer goods and 5.6% for non-durable consumer goods), 2.0% for capital goods, 5.9% for intermediate goods and 21.2% for energy.

Month on month the index registered a 1.2% increase with respect to the month of April 2008.

Now if we look at Producer Prices and Consumer Prices compared (chart below) we will observe how the producer price index suddenly shot up as of the middle of 2007, dragging the consumer price index (red line) in its wake. At the moment the rate of increase in producer prices is still on a very strong upward trajectory, which gives little confidence that producer prices are going to start to slow their rate of increase substantially any time soon, which means we may expect continuing pressure on the CPI, and hence continuing pressure on the ECB to raise interest rates.

Now to get some idea of what is actually happening here, maybe a comparision with the German PPI might be useful. Germany is, after all experiencing more or less the same energy and food price shock as Spain. So why is the German rate of PPI increase so significantly below the Spanish one (see chart below)? It wouldn't seem to make sense would it?

Well is we look at the comparative charts for nominal hourly labour costs we can soon see at least one significant part of where the problem is. After mid 2007 the paths of the two lines diverge (see chart below) with Spanish labour costs shooting up while the German ones trend down. And this remember while the German economy continued with a more or less healthy rate of expansion, while the Spanish one started to head towards negative growth. Why did Spanish wages shoot up in this way? Answering that question would probably get us a significant part of the way down the road to understanding why Spain, in addition to all the other macro issues facing it, also has th¡s really complicated and complicating cost inflation problem.

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