Explanation: the oddity of inflation that is costing Spain billions

A woman takes milk at a Caprabo supermarket in Barcelona, ​​Spain, March 21, 2022. REUTERS/Albert Gea/Files

Join now for FREE unlimited access to Reuters.com


MADRID/LISBON, May 12 (Reuters) – Soaring energy prices pushed Spanish inflation to a peak of just under 10% in March, the highest in the euro zone and nearly double 5.3% from neighboring Portugal – despite the fact that the two Iberian economies share a wholesale electricity market.

The disconnect lies in the way energy prices are factored into Spain’s overall inflation figure – a statistical oddity with consequences for the real economy due to the widespread indexation of pensions, wages and rents in Spain.

Reuters Charts
Reuters Charts

Here is a brief explanation of what is at stake.

Join now for FREE unlimited access to Reuters.com



Caixabank analysts first pointed it out: the inflation index only includes regulated electricity contracts taken out at variable rates linked to fluctuations in wholesale market prices.

While these contracts were used by the majority of consumers, over the past five years the proportion has fallen to just one-third. Thus, the majority of Spaniards have aligned themselves with their Portuguese counterparts, 85% of whom are on fixed-term contracts offered by distributors. The problem is that the prices they pay are not taken into account in the Spanish inflation index.


Normally, fixed rate electricity customers would expect to pay a premium for the peace of mind of predictability over a three-year term. But today they are fortunate to be sheltered from wholesale price hikes related to the war in Ukraine.

A senior government official has estimated that official data could overestimate Spain’s actual inflation by around two percentage points: indeed, the Spanish government forecasts average inflation of 6% this year, while Portugal forecasts 4% by the end of 2022.

Monthly data tells a similar story. While electricity market prices eased slightly, Spanish headline inflation fell in April from its March peak of 8.4%, compared to 7.2% in Portugal. Core inflation – excluding energy and fresh food prices – showed that this difference was entirely determined by these volatile components: In April, core inflation in Spain reached 4.4% and in Portuguese 5%.


According to calculations by economic think tank Fedea, every one percentage point increase in the CPI means an additional €1.7 billion spent by the state to increase pensions, meaning the statistical anomaly could cost Spain at least 3.4 billion euros in public pensions alone.

There are other ripple effects: rents in Spain are indexed to inflation – although the government suspended it for three months until June – and the indicator is widely used as a guideline by unions and employers to negotiate wages.


Spain’s statistics office INE has set to work to redo the inflation indicator incorporating free market prices, but the reform forces companies to provide millions of data on a like-for-like basis and not all are cooperating in the same way .

“In order to adapt the CPI to truly reflect the price of electricity, we need the data from the electricity companies and we have been trying for months to obtain this detailed data,” said last week. Economy Minister Nadia Calvino. “We need everyone to help us.”

Iberian countries are expected this week to approve a Brussels-backed temporary average cap on soaring benchmark prices for natural gas and coal used in power plants, aimed at containing rising electricity prices in the regional wholesale market (MIBEL). Read more

The prices at which Spanish and Portuguese producers sell electricity on the regional wholesale market (MIBEL) are determined by the highest marginal cost of production, which is currently that of gas-fired and coal-fired power plants.

This measure may help dampen Spanish inflation a little, but it does not solve its statistical problem.


In addition to this statistical discrepancy, there is another factor explaining the much lower prices paid by the Portuguese in what some have dubbed their “electricity miracle”.

In Portugal, the price regulated by the local monitoring body, named ERSE, remains fixed throughout the year, although it may be revised quarterly, but to a limited extent. Portuguese consumers can also switch freely between regulated tariffs and free market tariffs, choosing whichever is lower.

Moreover, unlike Spain, the increase in regulated tariffs in Portugal is contained because the fixed “feed-in tariffs” guaranteed to renewable energies – solar and wind – are currently well below MIBEL electricity prices, and in the under current pricing this reduces the system-wide tariffs set by ERSE.

Around 40% of Portuguese consumers’ energy bills – excluding taxes – at regulated tariffs are linked to this renewable energy component.

Join now for FREE unlimited access to Reuters.com


Reporting by Belén Carreño in Madrid and Sergio Gonçalves in Lisbon; edited by Mark John and John Stonestreet

Our standards: The Thomson Reuters Trust Principles.

About Alma Ackerman

Check Also

Tough roster decisions await LAFC as it sorts through player contracts

The eventual MLS Cup champion LAFC celebrates after their victory over Austin FC in the …