Virtues and vicissitudes of disinflation

The drop in inflation below the 2% threshold —Spain being, along with Belgium, the first country in the Eurozone to achieve this so far this year— is good news for the pockets of consumers and strengthens the competitive position in relation to our main community partners. However, the divergence between countries in the rate of de-escalation of prices also highlights the difficulty for the European Central Bank (ECB) in its task of finding a monetary path adapted to all situations: the interest rate could end up being too high for our economy, which has already reached the inflation target, and lax for others, still under strong pressure.

For now, the balance is positive. Domestic demand is stagnant, but the Spanish economy continues to expand, as a result of increased competitiveness and the drive for exports, especially those aimed at European markets. This explains the strong increase in the external surplus: according to data from the National Statistics Institute (INE) released this week, the surplus exceeded 6% of GDP in the first quarter, the absolute maximum in the historical series.

These results should be weighed, because the inflation differential with the euro zone is not as pronounced when the most volatile components of the index are excluded. Excluding energy and food, our inflation rate is around one and a half points below the European average, when the gap is four points in terms of total CPI. On the other hand, the international pull is partly due to specific factors, such as the normalization of tourism.

But the key question is whether the external pull is sustainable in the current context of tightening of monetary policy. In Spain, the cost of money has been above inflation since April. In other words, interest rates have become positive in real terms, something that tends to weigh down the consumption of indebted households and the demand for credit by companies, pointing in a restrictive direction. Germany, however, remains in the area of ​​net negative real interest rates, giving wings to the hawks inside and outside the ECB who are advocating new turns of the monetary screw.

Much depends on the relative impact of the rise in interest rates —increasingly restrictive with respect to domestic demand— versus the export stimulus that comes from improving competitiveness. To attenuate this contradiction, and for the balance to continue leaning on the positive side, it is crucial that the external dynamism be accompanied by more investment and an increase in productivity and wages. This would be the best way to neutralize the depressive effect of interest rates. It is therefore convenient to monitor the implementation of the salary pact and the deployment of the reforms that most affect investment and productivity.

On the other hand, economic policy should integrate inflation asymmetries between member countries. Although the task of monetary policy is not easy in a context of heterogeneity, it is convenient that all perspectives, and not only the most orthodox, be considered equally in the decision making of the monetary guru —something that, in the case of Spain advocates a certain containment in relation to future rate increases. Fiscal policy is the only one likely to respond to the inflation situation specific to each country. In our case, it can play a key role in driving investment and reforms, in a context of reducing imbalances. Meanwhile, we are looking at a CPI of around 4% for the year as a whole, and economic growth of more than 2%, in both cases improving the European average.

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