Setting aside the wars, the cost of living is the major post-pandemic factor that daily gnaws at the well-being of citizens in many developed countries, fueling populist sympathies and eroding trust in institutions. But, for the second consecutive month, Spain’s inflation has stood at a fairly modest 2.3%, aligned with the European Central Bank’s expectations. How can this sense of a continual uphill climb be explained when it does not appear in the figures?
First of all, statistics, which are very useful indicators for spotting trends, are not suited to producing detailed radiographies of a complex situation. In the case of the CPI, there is a step effect, meaning the comparison is made with the same month of the previous year, which was particularly high. So even though prices continue to rise, they do so at a slower pace than a year earlier. Furthermore, these are average calculations that mask deep deviations and, in the case of the CPI, reflect a very particular shopping basket that does not include rents and does not mirror the conditions of many families, especially those with fewer resources.
“The perception of runaway prices has anchored itself in consumers who do not perceive that balm of price moderation”
In a low-income household, the shopping basket represents a relatively larger share of expenses than in a high-income household, where the increase is much more easily absorbed. For a low-income household, the price of seafood is not as significant as a 30% rise in the price of eggs. Donald Trump rode into the White House buoyed by the eggs price in the United States, a central element of his campaign. And, note, that U.S. egg prices have plunged in the past year, for reasons not largely attributable to the Trump Administration (a mix of farms adapting to the initial shock of avian flu and a drop in demand that has softened price pressure).
Common foods such as chocolate and coffee have also reached astronomical prices. They are items with high elasticity; consumption can be reduced without risk or lower-quality options can be bought, but the result is that shoppers leave the supermarket aggrieved. And that impact is built upon the egg price surge, the olive-oil shock—which has dropped by about 30% but the shock persists in consumers’ psyche—and a long etcetera.
“People tend to focus more on price increases than on decreases of the same magnitude, which can lead to an upward bias in the perception of inflation,” said Christine Lagarde, president of the ECB, to the europarliament last week to explain this disparity between perceived inflation and what the statistics show.
Olga Cantó, director of the Master’s in Applied Economic Analysis at the University of Alcalá, recalls that the rise in the shopping basket in previous years has eaten into gains in labor participation or wage improvements. The perception of runaway prices has anchored itself in consumers who do not perceive that balm of price moderation.
This is compatible, Cantó explains, with there being an improvement in poverty thresholds that show relative income gains against the average but not a looser relationship with the cost of living. Poverty is more related in recent years to material deprivation.
“The lowest incomes do not have a cushion to weather shocks”
“When we measure income we do not account for the capital erosion of wealth; the lowest incomes do not have a cushion to face impacts. The economist notes that this sense of lacking a plan B increases uncertainty.
This concept of economic insecurity is very difficult to measure, but it may lie behind the economic discomfort felt by citizens that isn’t captured in the data. Although the risk of losing a job has not materialized, many people feel insecure. “The number of people we would call insecure is large compared with other European countries, and it raises the perception of discomfort”, Cantó explains.
And this occurs in a context of unemployment at pre-crisis lows and among young people close to full employment. This cohort—an expansive concept that can reach up to 35 years old—of urban youth is the one most vocal in dissent because their wages do not permit access to housing. Yet 70% of Spaniards live in a home they own, so this serious housing issue, for which no near solution is in sight, cannot define the malaise of the majority of Spaniards. What homeowners have endured is a bite in the form of municipal waste-management charges that have also contributed to the sense of being squeezed by bills.
Raymond Torres, chief economist of Funcas, the think tank of the savings banks, points to another element that has eroded Spaniards’ incomes in recent years: the non-deflation of the IRPF tax rate has caused take-home pay of lower incomes to erode in favor of taxation.
“The middle class is the one that feels most threatened in its lifestyle, and they are not wrong”
Wages earning minimum salaries have improved far above inflation, yet low wages have suffered significant wear. Taxes are higher, and yet essential public services such as healthcare or transport have deteriorated. The middle class is the one that feels most threatened in its lifestyle, and they are not wrong.
“The reality is that with three million more inhabitants there is more saturation, especially where there is less public interest in investing in healthcare, and transport is very strained.” The everyday impact on citizens’ well-being from the weakening of public services is a key ingredient in the cocktail of dissatisfaction.
For this reason, Torres believes that a standard wage-revenue pact would not be enough to address the problem of the current well-being loss, which is comprehensive. “We would have to intervene in taxation, public spending, and the maintenance of infrastructures…”
“The rise in capital incomes in recent years has accelerated since 2022. This includes, among other sources of income, rents”
Nevertheless, an improvement in the distribution of incomes remains necessary. Cantó recalls how “wages lag behind capital gains”, and Torres concurs that the rise in capital incomes in recent years has accelerated since 2022. This includes, among other incomes, rents.
The almost certain rise in energy prices due to the newly started war against Iran by the United States and Israel will likely worsen this situation. The government may once again resort to some measures already tested in 2022, such as reducing the VAT on certain food products or even on the electricity bill. But more heterodox and imaginative initiatives should also be on the table to guarantee relief in the grocery basket. Most clash with EU State Aid or Competition criteria, which for years have been the bloc’s bogeyman, yet have ended up being a corset that has weakened the room for maneuver of the States.
