After the figures have shown a new rebound, Javier Molina, senior market analyst for eToro, analyzes the possibility that the “predictions of lower inflation are not as solid as would be desired.” This raises the question of who may be making a mistake: “a market that discounts inflation control and falling rates, or central bankers who remember “high rates for longer” to ensure inflation control.”
CPI: central bankers facing the market Who will be wrong? Javier Molina, senior market analyst for eToro
After the CPI data known today from Spain, doubts arise about who is wrong. A market that discounts inflation control and falling rates, or central bankers who remember “high rates for longer” to ensure inflation control. The difference for the stock markets is not minor because, if the latter are right, the scare could be huge.
Looking ahead to 2024, the prospects for the Spanish economy are clouded by the delicate balance between growth and price stability. The country's GDP growth rate remained strong throughout 2023, reaching 2.4%. However, economic winds are weakening and expectations for this year tend to be slightly weaker, with growth expected to be just 1.6%.
Inflation, the unpredictable beast that has kept economists and authorities nervous, remains under the microscope. Forecasts indicate that the consumer price index (CPI) will slow to around 3% this year and the core CPI is expected to be slightly above 3.2%. This change in inflation could be interpreted as a positive sign that the purchasing power of Spanish consumers may be under less pressure than expected.
However, closer analysis shows that the situation may not be as clear-cut as the figures being discounted suggest. The National Institute of Statistics (INE) highlighted a worrying trend at the beginning of the year. The estimated annual inflation rate increased to 3.4% in January 2024, a notable increase compared to 3.1% in December 2023. This increase is mainly due to higher electricity prices, which appear to offset the lower fuel prices. Even more revealing is data on core inflation, which excludes the most volatile components such as unprocessed foods and energy products. This is 3.6%, which corresponds to a decrease of only two tenths.
In this context, predictions of lower inflation may not be as strong as would be desired. Interest rates are expected to fall by 0.75 points by the end of 2024, and intervention by the European Central Bank (ECB) will add further complexity. Although this measure is intended to stimulate the economy, it could also have a secondary impact on consumer prices. At the moment, I am not clear about this rate decrease and the focus will continue on inflation.
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