# The inflation quirk that is costing Spain billions Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-05-12 Category: FINANCE Category URL: https://financedigest.com/category/finance Meta Title: The Distortions of Spain's CPI Calculation Explained Meta Description: Discover how Spain's CPI is skewed by energy prices, affecting pensions, wages, and rents. Learn why the official data may be overestimating real URL: https://financedigest.com/the-inflation-quirk-that-is-costing-spain-billionshtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-05-12t091728z2lynxnpei4b0dsrtroptp4spain-economy-inflation-1736815736936-compressed.jpg) By Belén Carreño and Sergio Goncalves MADRID/LISBON (Reuters) – Surging energy prices pushed Spanish inflation to a peak of just under 10% in March, the highest in the euro area and nearly double the 5.3% in neighbouring Portugal – despite the fact the two Iberian economies share a wholesale electricity market. The disconnect lies in the way that energy prices are built into the headline Spanish inflation figure – a statistical quirk with real-economy consequences because of Spain’s widespread indexation of pensions, wages and rents. ![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/05/chart-1-1.jpg) ![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/05/chart-7.jpg) Following is a brief explainer of what is at stake. HOW [SPAIN’S CONSUMER PRICE](https://www.financedigest.com/carrefour-unveils-30-euro-shopping-basket-in-spain-after-government-price-cut-proposal.html "Carrefour unveils 30 euro shopping basket in Spain after government price cut proposal") INDEX IS CALCULATED Caixabank analysts flagged it first: the [inflation index only includes regulated electricity contracts taken out at a variable rate tied to fluctuating wholesale market](https://www.financedigest.com/hungarys-booming-wedding-market-doused-by-soaring-inflation.html "Hungary’s booming wedding market doused by soaring inflation") prices. While such contracts used to be taken up by the bulk of consumers, in the last five [years the proportion has dropped to just one third](https://www.financedigest.com/more-than-a-third-of-people-think-cash-will-become-obsolete-in-the-next-25-years.html "More Than a Third of People Think Cash Will Become Obsolete in the Next 25 Years"). Thus the majority of Spaniards have [moved into line](https://www.financedigest.com/the-plant-based-snacks-market-to-move-along-the-lines-of-staunch-advocacy-towards-innovation.html "The Plant Based Snacks Market To Move Along The Lines Of Staunch Advocacy Towards Innovation") with their Portuguese peers, 85% of whom are on fixed-term contracts offered by distributors. The problem is that the [prices they pay aren’t counted in the Spanish inflation](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc.html "UK shop price inflation hits record 8% in January: BRC") index. HOW MUCH DOES THIS DISTORT CPI BY? Normally, fixed-tariff electricity customers would expect to [pay a premium](https://www.financedigest.com/finnish-businessman-zilliacus-ready-to-pay-premium-for-manchester-united.html "Finnish businessman Zilliacus ready to pay premium for Manchester United") for the peace of mind of predictability over a term like three years. But now they are lucky in that they are shielded from the [rises in wholesale prices](https://www.financedigest.com/renault-revenues-rise-30-in-q1-on-higher-sales-and-prices.html "Renault revenues rise 30% in Q1 on higher sales and prices") linked to the Ukraine war. One senior government official estimated the official data may be overestimating Spain’s real inflation by around two percentage points: Indeed, the [Spanish government sees average inflation at 6% this year](https://www.financedigest.com/10-year-david-goliath-crusade-finally-sees-justice-for-off-plan-spanish-property-buyers.html "10 year ‘David & Goliath’ crusade finally sees justice for off-plan Spanish property buyers") while Portugal predicts 4% by the end of 2022. [Monthly data](https://www.financedigest.com/more-than-half-52-of-cisos-are-prioritising-gdpr-compliance-over-the-next-12-months-new-data-from-the-2017-financial-services-information-security-network-shows.html "More than half (52%) of CISOs are prioritising GDPR compliance over the next 12 months, new data from the 2017 Financial Services Information Security Network shows") tell a similar story. As electricity market prices eased slightly, [headline Spanish inflation](https://www.financedigest.com/boes-mann-falling-headline-inflation-high-core-make-policy-difficult.html "BoE’s Mann: Falling headline inflation, high core, make policy difficult") fell in April from its March peak to 8.4%, compared to 7.2% in Portugal. [Core inflation – excluding energy and fresh food prices](https://www.financedigest.com/euro-zone-inflation-eases-in-feb-but-core-prices-pick-up.html "Euro zone inflation eases in Feb but core prices pick up") – showed this gap was entirely determined by these volatile components: In April, core inflation in Spain reached 4.4% and in Portugal 5%. WHAT DOES AN OVERESTIMATED CPI [MEAN FOR SPAIN](https://www.financedigest.com/what-brexit-mean-for-british-buyers-in-spain.html "WHAT BREXIT MEAN FOR BRITISH BUYERS IN SPAIN")? According to calculations by economics think tank Fedea, each percentage point rise in the CPI means an additional 1.7 [billion euros](https://www.financedigest.com/eu-seeks-clarification-on-italy-post-covid-plan-freezes-19-billion-euros.html "EU seeks clarification on Italy post-COVID plan, freezes 19 billion euros") spent by the state to increase pensions, meaning the statistical anomaly could be costing Spain at least 3.4 billion euros in public pensions alone. There are other [knock-on effects:](https://www.financedigest.com/banking-turmoil-will-not-have-knock-on-effect-on-commodities-trafigura-cfo.html "Banking turmoil will not have knock-on effect on commodities -Trafigura CFO") rents in Spain are indexed to inflation – though the government has suspended that for three months through to June – and the indicator is widely used as a guideline by unions and employers to negotiate wages. HOW TO SOLVE IT Spain’s INE statistics office has set to work to redo the [inflation indicator by incorporating free-market prices](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc-2.html "UK shop price inflation hits record 8% in January: BRC"), but the reform requires companies providing millions of pieces of data on a like-for-like basis and not all of them are cooperating in the same way. In order to adapt the CPI to truly reflect the price of electricity we need data from the electricity companies and we have been trying for months to get this detailed [data,” Economics minister Nadia Calvino said last week](https://www.financedigest.com/wall-st-seen-steady-ahead-of-inflation-data-fed-later-in-week.html "Wall St seen steady ahead of inflation data, Fed later in week"). We [need everyone](https://www.financedigest.com/a-beginners-guide-the-trading-terms-everyone-needs-to-know.html "A beginner’s guide – the trading terms everyone needs to know") to help. The Iberian countries are expected to approve this week a temporary Brussels-backed average cap on sky-rocketing reference prices of natural gas and coal used in [power plants](https://www.financedigest.com/edpr-brings-iberias-first-wind-solar-power-plant-on-stream.html "EDPR brings Iberia’s first wind-solar power plant on-stream"), aiming to contain the rise in electricity prices in the regional wholesale market (MIBEL). Prices at which [Spanish and Portuguese generators sell electricity in the regional wholesale market](https://www.financedigest.com/2017-spanish-property-market-gems-kyero-com-gazes-into-the-crystal-ball.html "2017 Spanish property market gems – Kyero.com gazes into the crystal ball") (MIBEL) are determined by the highest marginal cost of production, which is currently that of gas-fired power plants and coal power plants. This measure may help [ease Spanish inflation](https://www.financedigest.com/german-inflation-rate-to-ease-over-course-of-2023-econ-minister.html "German inflation rate to ease over course of 2023 – econ minister") a little, but it does not solve its statistical problem. THE PORTUGUESE “ELECTRICITY MIRACLE” In addition to this statistical mismatch, there is another factor explaining the much lower [prices paid by the Portuguese in what some have dubbed their “electricity](https://www.financedigest.com/swedish-energy-minister-need-to-decouple-gas-from-electricity-price.html "Swedish energy minister: need to decouple gas from electricity price") miracle. In Portugal, the price regulated by the local watchdog, named ERSE, remains fixed throughout the year, although it can be [revised quarterly](https://www.financedigest.com/spain-q2-quarterly-gdp-growth-revised-to-1-5-from-1-1.html "Spain Q2 quarterly GDP growth revised to 1.5% from 1.1%"), but to a limited extent. Portuguese consumers can also [move freely between regulated](https://www.financedigest.com/moving-past-regulation-the-future-of-open-banking.html "Moving Past Regulation: the future of open banking") tariffs and free-market tariffs, choosing whichever is the lowest. Furthermore, unlike Spain, the rise in [regulated tariffs in Portugal is being contained because the fixed ‘feed-in tariffs’ guaranteed to renewable energies](https://www.financedigest.com/uk-energy-regulator-drops-plan-to-ring-fence-customers-cash.html "UK energy regulator drops plan to ring fence customers’ cash") – solar and wind – are currently much lower than the MIBEL electricity prices, and under the current price-setting formulae this lowers the system-wide tariffs set by ERSE. Around 40% of Portuguese [consumer’s energy bills – excluding taxes](https://www.financedigest.com/germany-to-lower-sales-tax-on-gas-to-7-in-bid-to-relieve-consumers.html "Germany to lower sales tax on gas to 7% in bid to relieve consumers") – with regulated tariffs is related to this renewable energy component. (Reporting by Belén Carreño in Madrid and Sergio Gonçalves in Lisbon; editing by Mark John and John Stonestreet) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---