Energy costs push Spain’s inflation to 29-year high

Spanish consumer prices rose at their fastest pace since 1992 in October on the back of higher energy prices, official data showed Thursday.

Published: 28 October 2021 12:05 CEST

a cashier and a customer at a supermarket in spain

Food prices, together with fuel and energy bills, are where people in Spain are noticing price rises most. Photo: Gabriel Buoys/AFP

Inflation climbed year on year by 5.5 percent, accelerating from a 4.0 percent increase in September, national statistics institute INE said.

That is its fastest pace in 29 years, since September 1992, when the rate was 5.8 percent.

The surge in inflation in the eurozone’s fourth-largest economy was due largely to a spike in the price of electricity, and to a lesser extent to higher gas prices, it added.

Bank of Spain governor Pablo Hernández de Cos warned Monday that higher inflation rates are likely to be seen over the coming months since high energy prices are likely to last through the winter as demand rises due to colder weather.

As in other European Union nations, inflation in Spain has risen since the start of the year after consumer prices declined during most of 2020 due to the economic impact of pandemic lockdowns.

The European Central Bank (ECB) expects inflation will rise by 2.2 percent in the entire 19-country single currency area this year, above its target of 2.0 percent.

It has insisted that the inflation spike is “temporary” in nature, driven by one-off pandemic-related effects that will gradually dissipate over the course of 2022.

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The onset of winter will raise concerns for many in Germany about the cost of heating their homes, with memories of last year’s rocketing prices and concerns over domestic gas supply resurfacing.

But, compared to last year, the energy prices have now largely stabilised, though they are still higher than in 2021.

The stabilisation in prices is partly thanks to the government’s energy price cap which came into force earlier this year to cushion the blow of soaring energy prices by capping electricity costs at 40 cents per kilowatt-hour and natural gas at 12 cents.

The federal government plans to maintain this cap until the end of April, though this could be extended even longer, if necessary.

How high are heating costs expected to go this year?

For the current year, experts from co2online expect somewhat lower heating costs than last year.

Heating with gas, for example, is expected to be 11 percent cheaper in 2023 than in 2022, costing €1,310 per year for a flat of 70 square metres.

The cost of heating with wood pellets will drop by 17 percent to €870 per year, and heating with heating oil will cost 19 percent less and amount to €1,130.

According to co2online, the costs for heating with a heat pump will drop the most – by 20 percent to €1,1105. The reason for this, according to co2online, is a wider range of heat pump electricity tariffs.

Tax hikes in January

Starting January next year, the government will raise the value-added tax on natural gas from seven to nineteen percent.

Alongside this, the CO2 price, applicable when refuelling and heating, will also increase.

According to energy expert Thomas Engelke from the Federal Consumer Association, these increases will mean that a small single-family household with three or four people that heats with gas would then pay about €240 more per year for gas.

“That’s a lot”, he said.

Another additional cost factor to consider is that network operators also want to raise prices. However, the federal government plans to allocate €5.5 billion to cushion this increase for consumers as much as possible, so how such cost increases will ultimately affect consumers is currently hard to estimate.

Overall, it can be said that, from January, consumers will have to brace themselves for higher energy costs, even though massive increases are currently not expected.

Consumer advocate Engelke advised customers to closely examine where potential savings could be made this upcoming winter: “Those who are now signing a new gas or electricity contract should inform themselves and possibly switch. Currently, you can save a few hundred euros. It’s worth it. On the other hand, you should also try to save as much energy as possible this winter.”