How Long Does Inflation Anger Linger? Spain May Have the Answer

Spain has had notable success in tamping down inflation, but for voters, the benefits will take a while to register—probably too long to make a difference at Sunday’s election.

This weekend’s ballot will decide the shape of the next government. It will also be a test case for whether voters perceive that the worst of the recent inflation is fading or whether anger over the cost of living lingers.

There is a lesson here for the U.S., where inflation fueled discontent with Democrats during last year’s midterm elections and could play a major role in next year’s presidential vote.

Spain’s annual rate of inflation has tumbled this year, falling below the European Central Bank’s 2% target in June. At 1.6%, it was well below the 5.5% pace of price rises recorded in the eurozone as a whole and the 3% registered in the U.S. 

Spain’s inflation rate had previously peaked at 10.7% in July 2022, while U.S. inflation peaked at 9.1% in June of that year, and in the eurozone it reached its recent high of 10.6% in October.

After more than two decades of low inflation, voters in many Western countries are angry about the rising cost of living. During the Covid-19 pandemic, many countries used massive fiscal and monetary stimulus to prevent a long economic slump. That policy and the fallout from Russia’s war in Ukraine drove up energy and food prices.

Now, political incumbents in Spain and elsewhere are finding they are getting little credit for improving data on growth and jobs because many voters are angry over the cost of living.

“Prices were the main topic of conversation between my friends and me,” said Carmen Paya, a nurse in Valencia. “Things have gotten better, but for my friends who really struggled a year ago, there is still frustration.”

It will take time for slowing inflation to begin to repair the damage done to real earnings by the surge in prices in 2021 and 2022. In the first three months of this year, Spanish workers were still earning less in real terms than at the start of 2022.

Spain’s economy has had a rocky few years. It has grown faster than those of other large European countries recently but remains smaller than it was in late 2019. 

A strong rebound from the real estate and banking crisis it suffered a decade ago was derailed by the Covid-19 pandemic. International tourism, which accounts for a big share of activity, has only returned to 2019 levels over recent months. And with interest-rate rises starting to hit households’ vacation budgets across Europe, economists say growth is likely to slow in the coming years.

Any declaration of victory in the fight against inflation may be premature since the speed of the decline is partly due to statistical quirks.

While household energy prices surged across Europe as Russia prepared and then carried out its February 2022 invasion of Ukraine, the rise in Spain was more immediate and larger than in many other countries. By March 2022, they were 60.3% higher than a year earlier.

That is because a large share of households—around 40%—pays electricity tariffs that are directly linked to daily moves in volatile wholesale prices. That is also the tariff that the national statistics agency uses to calculate inflation. 

In June 2022, the government capped natural-gas prices. Wholesale natural-gas prices have fallen by 90% from their peak in late summer of 2022. As a result, household energy prices are now much lower than they were in June 2022. Similar base effects are likely to push inflation rates lower in the rest of Europe over the coming months, economists say. 

Disregarding those big swings in energy prices, Spain’s inflation rate looks pretty much like it does elsewhere in Europe. The core measure—which excludes energy and food—stood at 5.9% in June, compared with 5.4% in the eurozone as a whole, driven by services such as recreation and restaurants. And if energy prices steady and stop lowering the all-items inflation rate, the continued rise in services prices may push the core measure higher again.

Spain’s labor unions and employers agreed in May on a schedule of pay rises over the coming years that reduces the threat of what European central bankers call “tit-for-tat” inflation, where businesses raise prices to maintain or increase profits, workers respond by demanding higher wages, and businesses raise their prices again. 

The deal includes a 4% raise this year and 3% in each of 2024 and 2025.

“The more we all work in the same direction, the sooner the victory will come,” said Núria Mas, an economics professor at the IESE Business School. “This agreement will play an important role in keeping inflation low.”

—Marcus Walker contributed to this article.

Write to Paul Hannon at [email protected] and Humza Jilani at [email protected]