Inflation: indirect effects, but not from a second round

In an environment where the start of the adjustment of spending in the economy is taking its time and given the sustained pressure from the price of commodities, particularly oil, in recent quarters, expected inflation for 2006 rises to 3.7%, 0.3 points more than the 2005 figure, and is put at 2.7% in 2007. The profile expected is adjusted to the outlook for oil prices, which should fall from the present levels of over 70$/barrel to around 60 dollars in December 2006 and 55 dollars at the end of 2007.

Over and above the performance of the total CPI, BBVA's Tendential Index, which eliminates the direct impact of energy and other volatile items from the basket, will rise by 3.0% and 3.2% in 2006 and 2007 respectively, rates unseen since 2003. Between 2002 and 2005, industrial manufacturing prices, which represent nearly half of the Tendential CPI, slowed from 2.5% to 1%, as a result of the virtual stagnation of commodities prices in euros until 2004 and the growing globalization of trade. The indirect effects of higher commodities prices since the middle of 2004 are being passed through to the consumer prices of manufactured products in a scenario of sustained growth of spending. However, no second-round effects through a price-wages spiral, of which there is no evidence, are to be expected. The sharp increase in the activity rate, with the arrival of immigrants and women joining the labour market, has led to a negative wage drift which has meant that the increase in the wage cost per worker is lower than negotiated in collective agreements. This reduces the rigidity of the Spanish economy's wage-formation process and favours the persistence of inflation through safeguard clauses.