Although the rise in energy prices made a U-turn in December (the energy component of the CPI registered a fall of 6.9% year-on-year) and we expect to see a decline in prices of 6.0% in 2023 on average, we estimate that energy prices will continue to add to inflation in 2023, albeit indirectly in this case. In particular, energy prices – which still remain high (20% above 2019 levels, according to the CPI) – have driven up production costs for many companies, which are being forced to pass on this increase in costs to their sales prices, at least partially.

To analyse the indirect impact of energy prices, we used the input-output tables for the Spanish economy to estimate the exposure to energy costs of the different categories of goods and services produced. By comparing this information with that of the categories of goods and services in the CPI, we classified the 92 components of the consumer index into products with a low, medium and high exposure to energy costs. To perform our analysis, we focused on the components of the core CPI, so we excluded energy products (for which energy prices naturally have a direct effect on the CPI) and food products (indirectly affected by energy, but more substantially by other cost shocks discussed later in this article). In addition, we excluded road and rail passenger transportation services, as intervention on their prices would skew our results.1

As shown in the first chart, according to our analysis, from December 2019 to December 2022 the median price increase for all products with a low exposure to energy costs was 5.3%, while in the case of products with a moderate exposure it was 7.1% and in those with a high exposure, 11.8%. If we calculate a price index for each group, using a weighted average according to the relative weight of each component in the CPI, we observe a similar dynamic. Thus, the price index of products with a low exposure registered a year-on-year increase of 2.9% in december; the moderate exposure index, an increase of 5.9%; and the high exposure index, 9.3%.

If we look at how these three clusters have contributed to core inflation (excluding public transport) in recent months, we see that it is the components most exposed to energy that are contributing the most to core inflation in proportion to their relative weight in the index. Specifically, in December 2022, the inflation of products with a high exposure contributed 0.9 pps to core inflation, which accounts for 19.5% of the observed inflation (which stood at 4.7%), double its relative weight in the index (9.8%).2 On the other hand, products with a moderate exposure generated 48.7% of the core inflation (2.3 pps), while their relative weight in the index was 38.7%. The contribution of low-exposure products, which account for 51.5% of the core CPI, was just 31.7%.

These results indicate that a large part of the core inflation we are currently experiencing is determined by energy prices. Given that energy prices are now moderating, we can expect that the impact of the indirect effects on the products most exposed to energy costs will not continue to escalate. However, due to the delay in the transmission of production cost increases to sales prices, we can expect the high inflation levels currently reached in the core components to persist during 2023.

In our analysis of the indirect effects of energy, we left out food, because the rising costs that agrifood producers are currently experiencing go beyond the shock in energy costs, also reflecting other factors such as the rising cost of fertilisers (key for the primary sector) and vegetable oil (key in processed foods). This compounding of shocks has led to a situation in which, in December of last year, the prices of fresh foods registered an increase of 11.4% year-on-year, and those of processed foods, 16.4%, making them the components that contributed the most to headline inflation.

In the primary sector, we note that the significant rises in fertiliser and animal feed prices are pushing up consumer prices considerably. According to data from the input-output tables for 2019, the acquisition of these two products was the main cost of production for the primary sector, which spent 24% of its revenues on these purchases (18% on feed and 6% on fertilisers). According to data from the Ministry of Agriculture, Fisheries and Food’s agricultural price observatory, in October 2022 animal feed prices had accumulated a 57% increase compared to October 2019, while fertiliser prices had more than doubled over the same period.

On the other hand, in the food industry we observe that two of the main items of intermediate consumption are agrifood commodities and vegetable oils, which are present in the vast majority of processed foods. In 2019 the industry dedicated 37% of its revenues to the purchase of these two types of products (30% to agricultural commodities and 7% to vegetable oils). The price increases of both products have also been significant. According to the aforementioned agricultural price observatory, the original selling price of vegetable oils rose by 68% between October 2019 and 2022, while the price of agrifood commodities increased by 53%.

As we show in the last chart, if we compare the information on the origin of the intermediate and wage costs of the agricultural and food sectors with the increase in prices of each product and the increase in unit labour costs in each sector, we see that, without taking into account the increase in costs of other products, the costs of both sectors would have increased substantially since 2019: by 47% in the agricultural sector and by 29% in the food industry.3 Given that the aforementioned production costs have seen significant increases in recent months, we do not expect their effect on consumer prices to fade in the short term. Therefore, our forecast scenario contemplates that consumer food prices will continue to rise in 2023.