A sharp rise in energy prices increases core inflation twice as much as an equal drop in energy prices reduces it.
MADRID, 10 Mar. (EUROPA PRESS) –
The impact of a significant variation in the price of energy on underlying inflation is greater in Spain than in the euro area, although its duration is shorter, according to a report published this Friday by the Bank of Spain.
The organization directed by Pablo Hernández de Cos has analyzed this issue in the article titled ‘Asymmetries in the translation of increases and decreases in energy prices to underlying inflation in the euro area and Spain’. Although underlying inflation does not take into account the evolution of energy, it is affected by an increase in this cost given its impact on the other products that the underlying inflation does measure.
It explains that, both in the euro zone and in Spain, underlying inflation responds more sharply to a large increase in energy prices than to a large decrease. In fact, a sharp rise in energy prices increases core inflation twice as much as an equal drop in these prices reduces it.
Furthermore, the study points out that the asymmetry in the response of underlying inflation to changes in energy prices is greater in the components that use energy more intensively in their production process.
It should be noted that underlying inflation reacts with a certain lag and gradually to shocks in energy prices, since the energy ‘shock’ takes time to be transferred to non-energy consumer prices.
This happens in Spain, where underlying inflation responds more intensely to a large increase in energy prices than to a fall, as happens in the euro zone.
However, the organization indicates that the magnitude of the responses of underlying inflation in Spain is greater than in the euro area, although its duration is shorter.
Energy prices experienced a sharp rise in early 2022, followed by a correction that began at the end of the same year.
The Bank of Spain has indicated that core inflation is moderating more slowly than general inflation, in line with the evolution that was forecast in the Eurosystem’s forecasting exercises.
And the article documents the existence of asymmetries in the translation of energy prices to underlying inflation. It is estimated that a significant increase in energy prices increases core inflation approximately twice as much as a decrease in energy prices by the same amount reduces it.
However, experts explain that this evidence is obtained from the historical patterns that have characterized the relationship between energy price shocks and underlying inflation.
In this way, they recognize that there is notable uncertainty about the validity of these patterns in a context like the current one, characterized by disturbances in energy prices whose nature is unprecedented, as well as exceptional circumstances in the evolution of the inflation and underlying inflation. “Therefore, this issue must be the subject of continuous analytical monitoring in the coming months,” they emphasize.
