Tuesday, August 21, 2012

Spain's record high misery index to rise further

Spain's misery index (combination of unemployment and inflation) hit a new record this month.

Misery index: Spain (white), Europe (yellow)

Many expect this measure to stabilize as Spain's inflation declines, given all the spare capacity. But these expectations will not materialize for a couple of reasons. One reason is the rise in fuel and food prices. We've already discussed the rise in fuel prices earlier. The increase in food prices in Europe is not just driven by the US drought - southern EU nations are having a drought of their own.
Reuters: - Hot, dry weather in eastern and southern European Union countries has severely hit prospects for this year's EU maize harvest, adding pressure to a world market already reeling from huge drought damage in the United States, a grain analyst said.

French-based Strategie Grains also said that even an improved outlook for the EU's wheat harvest would provide little relief to grain supply as this would be swallowed up by export demand and a shift in livestock feed away from scarce maize.
The second and an even more damaging contributor to Spain's inflation is the increase in value added tax (VAT). Starting this September, the standard VAT rate will increase from 18% to 21% and the "reduced rate" (on certain items) will be raised from 8% to 10%. That action will not only push the Spanish economy deeper into recession but will also add to Spain's inflation rate.
GS: - On our estimates the price level will rise by an additional 2% between July (owing to an ‘anticipation effect’ as the measure was announced) and March 2013, attributed just to the VAT hike.
As the new VAT takes effect, unemployment will rise further and inflationary pressures will continue - both contributing to the misery index.

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