Even if the war in Iran is short and oil and gas stabilize in a few weeks, the price increase has already impacted the Spanish economy, and the country is facing inflation peaks that will exceed 4% in the coming months. An acceleration of prices that will affect the purchasing power of families and businesses and that we will have to combat with little fiscal room, as EU fiscal rules constrain the ability to increase public spending or reduce revenues.
Gasoline and diesel have surged since the conflict began in the Middle East, which will have an impact on March's inflation, and it is foreseeable that as this productive input becomes more expensive, other goods and services that we consume will also increase in value. "The central scenario now assumes that the price of oil will evolve according to what is discounted in the futures markets (...), which point to maintaining the price around $102 in April and May, and a slow decline from June to end the year at around $81. Likewise, it is assumed that the price of Mibgas will be the one discounted in the futures as of today. In this scenario, an inflation rate of 3.6% is expected in March, which will rise above 4% in the following months," warns Funcas. If the scenario worsens and the price of oil remains around $102 throughout the year, then inflation will hover around 4.5% every month until December.
The forecast is in line with what BBVA Research presented on Monday, which expects the average inflation for this year to be 2.9%, two tenths higher than last year, and predicts a level above 4% in April and May. "For March, we foresee an inflation of 3.5% if the trends we have seen in the first half continue. The first thing we see is the increase in gasoline and diesel, which is the main impact. Electricity is not undergoing significant variations at the moment. By April and May, inflation could be around 4%. Our scenario is one in which the increase in fuel prices is short-lived and the impact is relatively moderate, with $75 per barrel during the second quarter. If we see a stabilization at higher levels, we would have greater impacts than what we are assuming," explained Miguel Cardoso, Chief Economist for Spain at BBVA Research. He also warned that fresh foods, which are already 45% more expensive than before the pandemic, could also face an additional price increase if fertilizer prices continue to rise.
In recent years, Spain has experienced an acceleration of inflation not seen since the 1980s, and now that it seemed contained and on track to the European Central Bank's (ECB) 2% target, the conflict in Iran has disrupted expectations. Companies and households are already facing more expensive fuels at the pump, something that particularly affects low-income households, with less room to face price increases, and sectors intensive in the use of these fuels, such as agriculture or transportation.
This situation forces the government to put forward measures to try to alleviate the inflationary impact, but this time it barely has fiscal room to address them, as the European Commission has not suspended fiscal rules - as it did after the war in Ukraine - and, with constant policies, Spain is not in a position to comply with them, as warned by BBVA. The country has also learned from the mistakes made in 2022 and the implemented policies that were not effective, hence it is now showing more prudence in making decisions.
"The high degree of uncertainty requires caution. We must wait. This is what economic authorities in Europe and in Spain should do, taking into account what we have learned from the war in Ukraine. At that time, there was a lot of emphasis on the three 'T's of measures: targeted, timely, and temporary; measures cannot be indiscriminate, they must be focused and centered on disruptions in the productive fabric. Additionally, they must be compatible with fiscal consolidation; it is very important to protect the most vulnerable groups but at the same time, a balance must be sought, although we know it is not easy," explained Rafael Doménech, Head of Economic Analysis at BBVA Research, who believes that it would be best to approve "direct income transfers, of a fixed amount, for the most vulnerable groups or families" with some "coordination at the European level." "All measures have a cost, and as taxpayers, we will pay for them, either directly through price increases or indirectly through taxes to finance transfers."
Experts advise that Spain wait in case the war lasts longer than expected and not implement measures with a high fiscal cost until then. For this year, they foresee an average annual growth of net primary spending (a closely monitored variable) of 4.6% during the period 2025-2031, compared to the 3.0% contemplated in the Adjustment Plan. The public deficit, after closing at 2.4% in 2025, would be at 2.3% of GDP in 2026 and 2.4% in 2027, worsening by 0.2 points and 0.6 points, respectively, compared to three months ago. If Spain wanted to comply with fiscal rules, it would have to make an additional adjustment of spending close to ¤8.8 billion annually (0.6 points of GDP of average structural correction each year), according to BBVA, which understands that "the need to comply with fiscal rules will reinforce this moderation of fiscal impulse, limiting the additional support to activity, despite the expected increase in defense spending."