The advanced CPI data corresponding to the month of March published today by the National Institute of Statistics (INE) has shown a significant drop to 3.3% year-on-year from 6% in February. Since before the outbreak of the war in Ukraine, and particularly after, the energy shock triggered Spanish inflation, which marked a maximum last June with a year-on-year rate of 10.8%. Since that record, it has begun a gradual decline that was only interrupted between December and February. However, this moderation in the year-on-year rate of the CPI does not mean that prices have fallen, as the trend is still bullish. But they do so at a slower rate compared to last month. The INE data, in fact, shows how prices rose 0.4% compared to February. The reason is well known in the economics profession, and is called the step effect.

What is the step effect?

The step effect is the impact generated, in year-on-year calculations, by comparing the data for one year with that for the same month of the previous year. The CPI figure for March of this year is compared with the figure for March 2022 whose prices were already strongly affected by the conflict in Ukraine, resulting in a sharp decline. In March 2022, prices rose 3% over the previous month and the year-on-year CPI jumped 2.2 points, from 7.6% to 9.8%. This initial impact is not included in the calculation of the CPI for March 2023, since it is an interannual figure, it covers 12 months from April 2023. Thus, although prices rise 0.4% in the month, inflation in 12 months low, thanks also to the fact that the energy component is under control.

What factors explain the decline in the CPI?

The CPI is a statistic that measures in a mobile and continuous way the evolution of the prices of each and every one of the components that make up the whole of the shopping basket. The Russian invasion had a strong distorting effect on the evolution of certain prices, mainly the energy component and fuel, which shot up to historical levels.

This caused the Government to adopt measures to counteract these effects, especially for families with a lower income level. Thus, a 20-cent reduction in the price of fuel was carried out and another series of measures was adopted to lower the price of the electricity and gas bill. The 80% year-on-year increases in electricity, gas and other fuels in March 2022 correspond to a 17.2% decrease this February, which is the latest data published by the INE, and which in view of the advanced data for March , when the definitive data is known, it will be even higher.

Will this step effect continue in the coming months?

Inflation data shows that last June, prices rose considerably (1.9%) compared to the previous month, so another similar event could happen, although to a lesser extent than in March, when it increased 3%. in the month.

Can there be a negative step effect on inflation?

Yes, the process is the same but in reverse. The evolution registered in April remains to be seen, since in that month of 2022 the CPI fell 0.2% compared to the previous month. Thus, even if prices remain frozen next month, inflation will rise two tenths due to the aforementioned step effect. The situation is similar in July (-0.7% in 2022) and September (-0.7%). In this case, the step effect could act, but in the opposite direction.

In any case, everything points to a high volatility in inflation, which, apart from the uncertainty due to the war, is facing a negative evolution in the price of food, which according to the Bank of Spain, could continue registering double-digit rates. , although slightly below the current levels close to 17%, in this case the weather and the quality of the crops playing a fundamental role.

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