Oil prices affect inflation in Spain more than in the euro zone

"It affects Spanish inflation more for two reasons. Firstly, because Spaniards spend proportionally more on petrol and diesel than people in other European countries, and also becuase fuel taxes in Spain are lower than in the other countries in the euro area", Luis J. Álvarez, co-author of the study and a researcher in the Bank of Spain's Research Department, tells SINC.

According to the study published in the journal Economic Modeling, even when fuel price changes are the same in every country, Spain is affected proportionally more. "Our Consumer Price Index (CPI) is more heavily affected", Álvarez explains.

To this can be added the impacts of the armed conflict in Libya. Álvarez explains that this situation means the inflation differential in Spain is increasing, as it is in the euro zone. "But this is a symmetrical effect. In other words, when oil prices fall again afterwards, Spain will benefit more from this than the other countries".

"Oil price fluctuations are an important engine in driving the variability of inflation. There are two kinds of taxes on fuel, with the first being VAT and the other a specific tax on this product, which is set and is higher in Spain than in most of the other European countries, which means that the end price including taxes fluctuates less", the expert explains.

In fact, changes in oil prices represent more than 50% of the variability in Spanish inflation, a figure that is rather lower in the euro area (45%), partly reflecting the lower proportion of indirect taxation in Spain.

The study used inflation figures provided by the National Statistics Institute (INE), the harmonised consumer price index produced by Eurostat (the European Union's statistical information office), the Gross Domestic Product (GDP) from Spain's quarterly accounts and the price of a barrel of Brent crude (the benchmark oil price in Europe) in order to study the direct, indirect and 'second time around' effect on inflation of increases and decreases in oil prices.

The short-term direct effects occur because the changes in crude prices are passed on to the prices of derivatives, such as fuel and heating fuel, and impact on the price of the shopping basket.

Indirect and 'second time around' effects have minimal impact

The indirect consequences stem from the impact on companies of the fluctuations in oil prices in relation to production costs, which may be passed on to consumer product prices over the long term. These 'second time around' effects refer, for example, to requests by unions to raise wages, which can also lead to additional price increases.

"In both economies, the direct effects have increased over the past decade, which is reflected in a higher proportion of refined oil product costs for households, while the indirect and 'second time around' effects seem to be losing impact", the article explains.

These transitory fluctuations also have more impact on Spanish salaries than on those in the other euro area countries. "However, the estimated scale of this effect is limited. In comparison with the impacts on inflation, the impacts on GDP growth are less important", Luis J. Álvarez explains.

More information: Luis J. Álvarez, Samuel Hurtado, Isabel Sánchez y Carlos Thomas, "The impact of oil price changes on Spanish and euro area consumer price inflation", Economic Modeling 28 (1-2): 422 – 431, March 2011.

Provided by FECYT - Spanish Foundation for Science and Technology