26.09.2022
Economic developments in the current inflationary setting and the
economic policy response*
Fundación la Caixa. "Economy and Society" lecture series
Pablo Hernández de Cos
Governor
*iEnglish translation from the original in Spanish.
Ladies and gentlemen, first allow me to thank Fundación la Caixa for inviting me to
participate in this series of lectures entitled "Economy and Society", which has become a
benchmark for in-depth analysis of current affairs.
Against the current backdrop of high inflation and considerable uncertainty over the
economic outlook, tragically marked by Russia's invasion of Ukraine, the first part of my
address will focus on describing the Banco de España's diagnosis of the economic situation
and outlook. I will then analyse the monetary policy response of the European Central Bank
(ECB) to this setting and some of its possible effects on the Spanish economy. Lastly, I
would like to highlight the role that other economic policies can play in tackling the
challenges we currently face.
1. The main determinants of the current economic outlook
Inflationary pressures are proving particularly high and persistent, causing significant
drops in real income
Inflation has surged persistently worldwide, becoming one of the major determinants of
economic developments. The reasons behind the rise in inflation are manifold and combine
supply and demand-side factors, whose weights differ depending on the geographical area
in question. These factors include high commodity prices on international markets,
production bottlenecks affecting certain goods (due to supply-demand mismatches
triggered by the lifting of pandemic restrictions) and shipping bottlenecks. Lifting the health
restrictions has also resulted in some of the demand for services being released, prompting
an acceleration in recreation, hospitality and tourism prices. In addition, changes in
practices, such as the rise of working from home, have led to higher spending on household
appliances, exerting further pressure on their prices.
In the case of the euro area and Spain, analysing the disaggregated data reveals the
following stylised facts:
1. The magnitude of the increase in inflation is unprecedented in recent times. In the euro
area, August saw the harmonised index of consumer prices (HICP) reach 9.1%. In Spain, it
has risen from slightly negative rates at end-2020 to 10.5% in August 2022. For context, to
encounter a similar rise we need to go back to 1977.
2. This inflationary episode is characterised by its high persistence. In Spain, inflation has
stood above 2% for 16 months. The last time this happened was in 2010-2011. You also
have to go back to that period to find such a persistent episode of inflation above 2% in the
euro area.
3. In terms of its components, the role of energy stands out. 40% of actual inflation in Spain
in August was attributable to electricity (2.3 pp) and other energy (1.9 pp). The percentage
is very similar in the euro area (43%).
4. The persistence and intensity of the rises in electricity and gas prices have been
surprising.1 As a result, they lie behind a highly significant portion of the inflation forecasting
errors in recent quarters. Almost half of the forecasting error in the Banco de España
projections in the first eight months of 2022 is due to the direct effects of the greater energy
price growth. And this is despite the measures adopted to contain the rise in these prices
having lowered headline inflation by 1.8 pp in that period.
5. The duration and scale of the increase in energy prices, and the concurrent rises in other
commodity prices, have made it difficult for firms to absorb the higher energy prices. Thus,
they have gradually fed into the prices of other goods and services, doing so more forcefully
than before the pandemic.2 These "indirect effects" are estimated to have contributed
onethird of the increase in underlying inflation in the euro area and Spain in August (10% of
headline inflation).
6. Food commodity prices have also surged, reaching historically very high levels, although
they have eased since their March peak. Such higher prices are attributable to strong global
demand, adverse climate factors and the higher costs of international shipping and some
key inputs, such as fuel and fertilizers.3 Between December 2021 and August 2022 annual
food price inflation increased by 8.1 pp in Spain (7.4 pp in the euro area),4 such that 30% of
inflation in August was attributable to food (3.2 pp) (25% in the euro area). It has also
triggered some pass-through to other goods and services: it is estimated that a 10 pp
increase in food commodity prices ultimately has a 0.4 pp impact on headline inflation
(HICP) after one year.
7. Underlying inflation has risen significantly, amounting to 4.9% in August in Spain (4.3%
in the euro area). In August, 43% of items saw inflation of more than 4% (over 50% in the
euro area). In Spain the contribution to this increase was particularly high in the case of
restaurants, cafés and the like, accommodation services and motor vehicles.5 "Recreation,
hospitality and tourism" contributed 1.6 pp to headline inflation in Spain, compared with
1.1 pp in the euro area.6
1
For instance, at the end of summer 2021 gas prices and, therefore, electricity prices, were expected to correct
downwards sharply from spring 2022. However, according to the futures market, this correction is now not expected
until 2023.
2
See J. M. González-Mínguez, S. Hurtado, D. Leiva-León and A. Urtasun (2022). "De la energía al resto de componentes:
la generalización del fenómeno inflacionista", Artículos Analíticos, Boletín Económico, Banco de España, forthcoming.
3
Fertilizer and natural gas prices are very closely related. In addition, the war has represented a further shock to
agricultural commodities, as Russia and Ukraine account for high shares of the corresponding international markets.
4
This behaviour does not differ from that observed in prior episodes of rising prices, such as the 2008 global food price
crisis. In addition, these prices are significantly more volatile in Spain than in the euro area as a whole.
5
See M. Pacce, A. del Río and I. Sánchez (2022). "The recent performance of underlying inflation in the euro area and in
Spain", Analytical Articles, Economic Bulletin 3/2022, Banco de España.
6
This difference is attributable not only to the larger increase in these prices in Spain, but also to this component's
greater weight in Spain's consumption basket. By contrast, the contribution of transport-related items was slightly
smaller than that observed in the euro area, due to both the lower inflation observed in Spain and their smaller weight in
the aggregate.
8. Compensation per employee grew by 4.8% and 3.4% in the euro area and Spain,
respectively, in 2022 Q2, figures markedly lower than actual inflation.7 As a result,
households have lost considerable purchasing power. Profit margins are holding relatively
stable at aggregate level. In Q2 the ratio of the GDP deflator to unit labour costs was similar
to pre-pandemic levels both in Spain and the euro area. Figures from the Banco de España's
Central Balance Sheet Data Office also point to a slight reduction in firms' profit margin
(defined as the ratio of the gross operating profit to sales) between 2021 H1 and 2022 H1.8
However, this change belies very high heterogeneity across sectors and firms.
9. The available supply and demand-side factor breakdowns reveal that in the euro area and
Spain the former are predominantly behind the rise in, and persistence of, inflation.
10. The observed stylised facts reveal some important differences compared with the United
States, where inflation is currently somewhat lower. Food is making a similar contribution,
but that of the energy component is considerably smaller (around 20%). By contrast, the
contribution of the core component is larger. Indeed, in August underlying inflation stood at
6.3%, with wage growth and the weight of demand-side factors being significantly higher.
A key determinant of the economic outlook is the course of the war in Ukraine and its
impact on energy markets
Europe is particularly exposed to the economic effects of Russia's invasion of Ukraine, given
its geographical proximity, its close trade and financial ties to Russia and, above all, its high
dependence on fossil fuel imports from Russia, with limited capacity to replace them in the
short term.
At the outbreak of the war, gas imports from Russia accounted for approximately 40% of
European gas consumption and 10% of its total energy consumption. The invasion of
Ukraine was a wake-up call for us about this vulnerability, which has materialised through
the reduction of almost 85% in the natural gas supplied via pipelines from Russia.
In May, this realisation led to RePowerEU, a plan that set two fundamental goals: to reduce,
by the end of 2022, dependence on Russian energy to one-third of its pre-war level (as a
prior step towards becoming fully independent by 2030) and to raise gas storage levels to
80% of total capacity by 1 October. In addition, in July the European Commission presented
a plan to reduce Europe's gas consumption by 15% next winter.
The degree of compliance with the two plans is relatively high. First, Europe has partially
replaced gas with other sources of energy. Second, it has increased the geographical
diversification of its gas imports, with more gas coming from Qatar, the United States and
Norway. It should be borne in mind that there are limitations on the replacement of gas
supply sources, since a significant part of the new imports must come by sea in the form of
liquefied gas, while the process of increasing current regasification capacity takes time. In
addition, this supply channel faces gas market integration problems, since the main
recipients of liquefied gas, including Spain, are unable to transport it to the Central European
countries that have been cut off by Russia from its gas supply. Third, the surge in gas prices
observed in the Dutch TTF market, Europe's benchmark, has intensified the reduction in
consumption. Between March and June, it had declined by 10% in Europe as whole and,
therefore, must accelerate to reach the goal set.
As a result, 84% of European storage capacity was in use in September, meaning that it is
above the 80% target set for early October.
Despite the headway made, how much time will Europe need to wean itself off Russian gas?
As I mentioned earlier, this will depend on many factors, including increasing the amount of
liquefied gas that can be shipped to Europe, its regasification and subsequent distribution
to where it will be consumed, the pace at which technical advances leading to energy
efficiency gains occur (and are subsequently adopted), and the possibility of expanding the
use of other energy sources, particularly renewables.
It is also true that the economic consequences of the war affect countries unevenly,
depending on their different levels of dependence on Russian gas.9 However, given the
surge in energy prices and European economic integration, economies such as Spain, that
depend relatively little on Russian supplies, will also be affected.
According to Banco de España estimates,10 a hypothetical interruption of energy imports
from Russia would have an impact of between 2.5% and 4.2% on EU GDP in the first year,
depending on the assumption considered regarding the European economies' ability to
replace Russian energy sources. The impact would range between 1.9% and 3.4% for
Germany, 1.2% and 2% for France and 2.3% and 3.9% for Italy. Such a scenario would
also foreseeably lead to a greater surge in inflation in the short term.
The impact on the Spanish economy would be substantially lower, given that Spain is less
energy dependent on Russia and has greater supplier diversification. Based on these
simulations, it would range from 0.8% to 1.4% of GDP. Practically one-half of these effects
would be attributable to the impact on the other European countries.
At any rate, these values should be regarded as short-term impacts which would gradually
decrease as the ability to replace Russian energy imports increases.
The outlook for the global economy has also worsened significantly
The combination of high inflation, tightening of financing conditions associated with the
monetary policy response in many countries and the persistence of bottlenecks, among
other aspects, is adversely affecting the global economy, resulting in macroeconomic
projections being revised down across the board.
Thus, in the United States, real GDP declined in the first two quarters and in China activity
plummeted in Q2 as a result of the measures adopted by the authorities under the
zeroCOVID strategy. This fall was particularly steep in the residential sector.
The decline in activity is also reflected in the adverse performance of international trade,
which began to decelerate in spring. In addition, although suppliers' delivery times and
bottlenecks have improved, the latter's effects remain significant. In parallel, most
commodity prices have tended to moderate since mid-year in view of the prospects of a
global economic slowdown, among other factors.
Overall, the financial markets consider that the likelihood of a global recession has risen
significantly. In particular, there is concern about the possible effects of the current
simultaneous tightening of monetary policy in numerous geographical areas. The individual
decisions of each central bank are fully justified because inflationary pressures are very high
and persistent in each of their jurisdictions. However, this raises the question of whether, in
such an interconnected world, simultaneous tightening could lead to an excessively
restrictive monetary policy stance worldwide, especially for emerging market economies.11
2. Recent developments and outlook
In H1 the economy has benefited from the easing of COVID-19 restrictions
The aforementioned recessionary forces are not yet reflected in the euro area's economic
data for the first half of the year. The full reopening of the economies in the wake of the
pandemic has unleashed strong demand for recreation, hospitality and tourism. Thus, euro
area GDP rose by 0.8% in Q2, compared with 0.7% in Q1, outstripping the 0.2% projected
in the Eurosystem's June forecasts. The growth in GDP in Q2 was higher than anticipated
in many euro area countries, and especially in Spain and Italy, which both saw an
unexpected surge in private consumption.
In Spain, GDP rose in Q2 by 1.5% quarter-on-quarter, mainly on the back of private
consumption, in turn driven by the services activity returning to normal and by positive
developments in the labour market. Tourism exports have also increased significantly.
Overnight hotel stays in August were only 1.6% below their 2019 level, with those of
residents nearly reaching their pre-pandemic level (-0.2%), while those of foreign tourism
stood 2.5% below the peak recorded in the same month of 2019.12
Overall, overcoming the health crisis is prompting a sectoral shift towards services, while
industry has fared worse owing to supply difficulties, among other factors.
Growth in activity has been accompanied by the continuing strength of job creation,
particularly in terms of the number of hours worked, which has risen by more than 3% in
H1.
In any event, the recovery in Spain remains incomplete, in contrast to the euro area. Thus,
a negative output gap compared with pre-pandemic levels persists in Spain (specifically, of
-2.2 pp), while this gap is already positive (1.8 pp) in the euro area as a whole. In the labour
market, the gap is narrower, although still negative, of -0.7% and -0.8%, respectively,
depending on whether it is measured in terms of total hours worked or number of people
employed, compared with the related slightly positive gaps (of 0.6% and 1.7%) observed in
the euro area.
The latest indicators show that activity has slowed
Q3 data point to a rapid slowdown in the euro area countries. The Purchasing Managers'
Indices (PMIs) signal a contraction in manufacturing in the big euro area economies, while
the Services PMIs point to a considerable slowdown, with a contraction in Germany and
Italy.
Looking to the coming months, the worsening outlook for households has prompted a
downward adjustment to their plans to spend on consumer durables.13 Also, the rise in
energy prices is having a very uneven impact. The decline in spending is proving more acute
among households with a smaller liquidity buffer. These are mostly lower-income
households which are also more exposed to energy price fluctuations.
In Spain, employment's momentum started to wane recently, albeit more so at the start of
the quarter. The other scant quantitative indicators that are still available for the quarter,
such as new car registrations or the retail trade index, on the demand side, and the industrial
production index, on the supply side, tend to confirm the loss of momentum in activity.
Among the confidence indicators, the August PMIs show signs of moderation in both
services and manufacturing. Manufacturing, in particular, evidences the decline in new (both
internal and external) orders. Industrial activity has continued to be weighed down by global
supply problems (which are affecting the automotive sector above all) and by the escalation
of input prices since 2021 H2 (which have affected a very high number of products).
Economic projections have been revised down notably for growth and up for inflation
The latest ECB projections for the euro area, in contrast to those published in June, include,
in particular, new developments in the gas market. First, gas prices were revised up in
accordance with developments in the gas futures markets. Second, and for the first time, a
degree of gas supply rationing, albeit moderate, is assumed. This would be more significant
in the countries that are more heavily dependent on Russian imports, which could even see
some production cuts in the winter. By contrast, demand for gas is expected to decline.
Euro area economic activity is expected to slow in the coming quarters, as a result of the
loss of purchasing power stemming from higher-than-expected inflation, the decline in
confidence and, in general, greater uncertainty. Moreover, although supply bottlenecks are
easing, they are still limiting activity in certain sectors.
That said, the euro area economy is expected to grow by 3.1% in 2022, before slowing
significantly in 2023 to 0.9% - vs the 2.1% forecast in June. In 2024 GDP is expected to
grow by 1.9% (2.1% in the June forecast).
Inflation continues to be driven by the surge in gas and food prices, demand pressures in
some sectors owing to the economic reopening, supply bottlenecks and the depreciation
of the euro. In addition, slightly stronger wage growth is expected, in the context of a robust
labour market, higher minimum wages in some countries and the delayed effects of past
high inflation rates. These factors more than offset the negative impact on inflation of the
weaker growth outlook.
As a result, inflation projections have been revised significantly upwards, although inflation
is expected to decline as the current inflation drivers gradually abate and the normalisation
of our economic policy passes through to the economy. The forecasts now put inflation at
8.1% in 2022, 5.5% in 2023 and 2.3% in 2024, an upward revision of 1.3 pp, 2 pp and
0.2 pp, respectively, with respect to the June projections.
In the case of the Spanish economy, the Banco de España will update its latest projections
in early October. The projections published in June envisaged GDP growth of 4.1% in 2022,
2.8% in 2023 and 2.6% in 2024. Meanwhile, inflation of 7.2%, 2.6% and 1.8% was forecast
for 2022, 2023 and 2024, respectively.
In any event, the latest developments I referred to earlier point to a downward revision for
economic growth in 2023 and an upward revision for inflation throughout the projection
horizon, in line with those for the euro area.
Thus, the latest Consensus Forecasts (relating to September) project 4.3% growth in Spain
for 2022, holding stable relative to June, and 1.6% for 2023 (vs the 3.0% forecast in June).
As for inflation, average rates of 8.8% and 4.1% are projected for 2022 and 2023,
respectively, up 1.3 pp and 1.5 pp, respectively, on the June projections.
The projections are surrounded by great uncertainty, with downside risks for activity
and upside risks for inflation.
In the near term, developments depend to a great extent on energy commodity prices.
Possible interruptions in energy supplies and harsh winter weather could bring about further
increases in energy prices and more severe production cuts than expected under the
baseline scenario.
Indeed, the ECB's latest projections include a downside scenario that envisages slightly
lower growth in 2022 and, in particular, a contraction in GDP of 0.9% in 2023, while
maintaining the expected increase of 1.9% in 2024. Under this scenario, inflation will be
even higher than under the baseline: 6.9% in 2023 and 2.7% in 2024.
This highly uncertain setting is also reflected in the dispersion among experts in the
oneyear economic outlook for the euro area. This dispersion is very high in the case of GDP -
close to the levels observed in the 2008 financial crisis - and stands at an all-time high in
the case of the one-year inflation outlook.
3. The role of economic policy
In response to the inflationary episode, the ECB has accelerated the process of
normalising its monetary policy
The sharp rise in inflation prompted the ECB to respond by embarking on a process of
monetary policy normalisation in late 2021. In March we discontinued net purchases under
the pandemic emergency purchase programme (PEPP). On 1 July, once the conditions set
out in our forward guidance had been met, we brought an end to the net purchases under
the asset purchase programme (APP). In late June, we raised interest rates by 50 basis
points (bp), thereby exiting negative territory for the first time since 2014. September saw a
further increase of 75 bp, the biggest hike in the history of the euro.
In July we also approved a new instrument, the "Transmission Protection Instrument" (TPI).
Subject to fulfilling the criteria established, under the TPI we will be able to make secondary
market purchases of securities issued in jurisdictions experiencing a deterioration in
financing conditions not warranted by the economic fundamentals, to counter risks to the
monetary policy transmission mechanism to the extent necessary. The TPI seeks to ensure
that our monetary policy stance is transmitted smoothly across all euro area countries, a
prerequisite for the ECB to be able to deliver on its mandate.
The ECB's actions over this period must be understood in light of the new monetary policy
strategy approved in 2021, which establishes a symmetric medium-term inflation target of
2%.
This medium-term orientation means that rather than basing our decisions on the latest
inflation figure, or even the inflation that we expect for the coming quarters, we base them
on our projections over a two or three-year horizon. This is because our actions affect
inflation very gradually, reaching their maximum impact after about two years. Maintaining
a medium-term horizon in the definition and attainment of the target is particularly important
in the face of certain kinds of shocks (such as adverse supply-side shocks, which push
inflation and activity in opposite directions in the short term).
Needless to say, predicting inflation over a two or three-year horizon is a very challenging
task. Especially in a setting as uncertain as the current one. With this in mind, we use various
indicators, such as surveys of professional forecasters and financial market prices. Key data
include the ECB staff projections, which, in turn, draw on a huge store of economic and
monetary analysis.
These projections have gradually revised medium term inflation upwards. Thus, in
September the average inflation forecast for 2024 stood at 2.3%, above our target and the
December 2021 projections (1.8%).
It should also be noted that, among other considerations, the projections at any given
moment are based on a future path of euro area interest rates - implicit in the financial
market data available when the projections were prepared. For instance, the September
projections were prepared on the information available at 22 August 2022, and incorporated
the expectation of a 50 bp hike at our September meeting, followed by subsequent further
increases14. Given that the medium-term inflation forecast was above 2%, returning inflation
to our target demanded that we accelerate the path of interest rate hikes as compared with
that foreseen in the projections. Hence the exceptional increase of 75 bp.
Ensuring that inflation returns to our target levels will require additional interest rate
hikes.
Of interest in this analysis are not only the baseline projection scenario, but also the
associated risks. These can be seen, for instance, in the adverse scenario described, in
which, as already noted, inflation stands at 2.7% in 2024, above the figure forecast in the
baseline scenario (2.3%) and further still from our 2% target.
One of the assumptions underlying this downside scenario is a complete cut-off of Russian
gas supplies. In this regard, on 2 September we learned that the Nord Stream 1 pipeline
that connects Russia and Germany had been shut down indefinitely, which might suggest
that we are now closer to that scenario. However, it should be noted that the downside
scenario includes other negative shocks that have yet to materialise. Moreover, the current
prices of gas, electricity and other energy and non-energy commodities are lower than those
included not only in the downside scenario, but even in September's baseline scenario.
We will also have to watch out for a potential de-anchoring of medium and long-term
inflation expectations above the 2% level. Such de-anchoring would affect the price- and
wage-related decisions that firms and households make in the present, causing even higher
and more persistent inflation, thereby requiring still more forceful monetary policy measures.
While we have yet to observe any signs that expectations are being de-anchored, there are
some signals that need to be watched. The most recent surveys of professional forecasters
put inflation in 2024 at, or just above, 2%. The data from inflation derivatives markets
(adjusting for risk premia) suggest likewise. However, the most recent round of the ECB's
monthly Consumer Expectations Survey (CES), published earlier this month, puts the
median inflation expectation three years ahead at 3%, up from just over 2% at the start of
the year.
We will be extremely vigilant of these indicators in the coming months. Indeed, the need to
guard against this risk is one of the reasons for the faster monetary normalisation that our
latest decisions entail.
Another risk relates to possible second-round effects, i.e. when high inflation passes
through to wage increases and these, in turn, push up consumer prices to the extent that
firms seek to maintain (or widen) their margins. Again, this would make inflation far more
persistent and increase the likelihood of the feared de-anchoring of inflation expectations.
As I said, while there is no evidence of such effects occurring at present, at least on a
widespread basis, the current high inflation does make this more likely.
Naturally, the extent of the economic downturn - over which, as I indicated earlier, there is
significant uncertainty -, and its effects on wages and profit margins, will be a key
determinant of the medium-term inflation outlook and, therefore, of our monetary policy
decisions.
Ultimately, our next decisions will be based on the incoming data and their implications for
achieving our medium-term inflation target, in line with the "meeting-to-meeting" approach
that we have adopted.
In any event, interest rates will have to reach a level that allows us to ensure a gradual
convergence of inflation to our medium-term target, and how quickly we reach that level will
be conditioned by the same target. Whether this means reaching interest rates at levels
close to neutral or higher will therefore depend on that target.
The normalisation of monetary policy is prompting a tightening of financial conditions.
The process of monetary policy normalisation has translated into a significant increase in
market interest rates. Since early 2022 the 12-month EURIBOR has climbed by more than
290 bp, while the 10-year overnight index swap (OIS) rate (typically used as the risk-free
benchmark interest rate) has risen by 240 bp. These increases have begun to pass through
to the cost of bank financing for firms and households, which will help to contain inflationary
pressures.
In Spain, long-term government bond yields have risen by 2.5 pp this year, and the risk
premium relative to the German benchmark has increased by 35 bp, although it has
remained stable since the TPI was approved. Meanwhile, the average cost of long-term
corporate debt issuance has also risen sharply (over 220 bp) and, as with public debt, has
reached levels not seen since 2014. Moreover, the IBEX 35 has fallen by nearly 11% since
early 2022.
The impact on bank lending conditions has been more subdued. The average cost of new
loans rose up to July (latest available figure), albeit moderately. Broadly speaking, the
passthrough from market interest rates to new loans occurs with a certain lag, but so far on this
occasion, it is proving slower than in recent episodes.15 The contained cost of some bank
liabilities, such as private-sector deposits, may be contributing to this difference.
Nevertheless, the increase is expected to fully pass through in the coming months.
In addition to the rising cost of bank loans, credit standards for approving loans to
households and firms tightened across the board in 2022 Q2, according to the latest edition
of the Bank Lending Survey. Looking ahead to Q3, in June banks expected a further
contraction in the supply of credit, especially in the case of financing to SMEs.
The tightening of financial conditions could increase the financial pressure borne by some
firms. Short-term and floating-rate loans make up an important part of corporate bank
financing, and the increase in market interest rates therefore passes through relatively swiftly
to the average cost of debt. For Spain, it is estimated that, given the increase in market
rates, the median indebted firm's ratio of financial costs to profits before interest will rise by
between 2.5 pp and 5.6 pp in the short term, depending on the percentage of debt and
loans that are refinanced in the short term.
In the case of households, it is estimated that the proportion that have a high net interest
burden will rise by nearly 4 pp in Spain. This effect would be more pronounced among
indebted households between the 20th and 40th percentiles of the income distribution.
Meanwhile, the steep rise in the public debt-to-GDP ratio seen since 2007 also means that
public finances are more sensitive to interest rate movements. However, the fall in interest
rates of recent years and the longer average debt maturities (currently standing at more than
eight years) limit the short-term impact. Overall, if the current expectations for rising interest
rates are incorporated, the public debt burden in Spain will increase from 2.2% of GDP at
end-2021 to 2.6% in 2024.
The role of monetary policy in combating inflation should be complemented by an
incomes agreement
As I have reiterated on numerous occasions, the outlook for our economy is highly
influenced by the risk of a price-cost feedback loop, which, if it materialised, would have
very adverse effects on external competitiveness, resulting in further losses in terms of jobs
and growth.
To avoid this, it is essential that economic agents (essentially firms and households, but also
general government) internalise the loss of income caused by the rise in the cost of imported
commodities.
As I mentioned earlier, the pass-through of inflationary pressures to wage settlements has
so far been very contained, and profit margins have remained stable. However, the use of
indexation clauses and the pass-through of higher costs to final prices have increased.16
Consequently, the signing of an incomes agreement, under the framework of social
dialogue, would be desirable, to share the burden between firms (which would have to
accept a reduction in their unit mar