The Bank of Spain is now more concerned than it was five months ago about the risk of an inflationary spiral due to the exhaustion it detects in the moderation efforts of workers and companies with respect to salary increases and the transfer of costs to prices. This was stated yesterday by the president of the Bank of Spain, Pablo Hernández de Cos, who defended the income pact to distribute the costs of the crisis and avoid the risks of stagflation. "The fundamental argument to defend the income pact is to avoid the inflationary spiral that ultimately always leads to lower growth, and therefore, to avoid at all costs the stagflation scenario that would be very dramatic," Hernández de Cos told the present the bank's annual report to the Economic Affairs Committee of Congress. Stagflation is already considered the height of evil, combining high inflation with minimal or negative growth.
The governor raises the alarm by verifying that the lengthening of the inflationary phenomenon is beginning to break the implicit income pact that has been maintained until now. By this implicit pact are meant the modest wage increases agreed so far and the only partial transfer of costs to the final price that companies have made, but this is coming to an end.
"The latest data on negotiated wages suggest that workers would be enduring a considerable loss of purchasing power in recent quarters," acknowledged Cos, adding that if inflationary pressure persists, it is more likely that they will move to wage negotiations, and that effects are generated in the second round.
The governor fears the strong return of salary guarantee clauses, which covered 75% of workers in 2007, but only reached 17% last December. But, with data from March, the percentage of workers with this type of clause has gone from 17% to 30%. They are also an essential demand of the unions.
Another recommendation of the governor is to abandon the generalized fiscal support and maintain only some very specific, very focused ones. The general measures should be gradually withdrawn, according to the analysis of the Bank of Spain, which underlines that given the very heterogeneous effects of the crisis on families and companies, the best thing is specific aid to the most vulnerable, but avoiding a "generalized fiscal impulse" .
The governor also anticipated a downward revision of a few tenths in the Bank of Spain's growth forecast. If the one set in April is 4.5% for this year, on June 10 they will be revised "one tenth down", given that the data for the first quarter of the year are lower than expected. At the same time, the average inflation forecast for this year will also be slightly lowered, which had been set at 7.5%. Instead, there will be a change in the underlying, but in the opposite direction, with an increase.
Looking ahead, the governor has indicated that available forecasts indicate that inflation will remain at high levels in the coming months, gradually moderating towards levels consistent with the ECB's medium-term inflation target of 2%.
