DATA PREVIEW: Chewing On Spanish Inflation Fudge

By Robert S Duncan

10 April 2002

Dow Jones International News

Who cares any more about Spanish inflation figures?

That's a hot topic again this week with Thursday's release of consumer price data for March, due around 0730 GMT.

Once again, the usefulness of the data is being questioned after January's controversial change in the way the national statistics institute, or INE, does the calculation.

Besides bringing forward the base year for the data to 2001 from 1992, INE revised previous years' data, changed some components and adjusted the indicator for seasonal effects, such as the bargain sales held nationwide every January and July.

As a result, critics say the changes make the figures difficult to estimate. There are also risks to inflation-linked annual increases to things like pensions and rentals.

"There is no link between the month-on-month figures and the year-on-year change," a London economist said, calling into question the effectiveness of the data.

But INE has argued the methodology changes were needed, to fall more into line with the European Union's harmonized CPI data, which are used by the European Central Bank to determine policy.

But if the E.U. already publishes the harmonized data, what use is the Spanish series?

                    Spain Comes First

Economists have already answered the question. Some who used to follow the Spanish data have either stopped making estimates or significantly trimmed them down.

JP Morgan in Madrid, for instance, now only releases quarterly inflation forecasts, while the Instituto de Estudios Economicos think tank only looks at the yearly figure.

"Focus will be all the more on the (European Union) harmonized figures and ignoring the national one, because that's what economists are focusing on," said Klaus Baader, an economist at Lehman Brothers in London.

But the national data do still have their uses. It's possible they reveal trends not visible elsewhere but, more importantly, they tend to come out a week or so ahead of the E.U. harmonized CPI.

It is, therefore, worth recording banks' forecasts for the INE series. According to an average of four economists - who still cover the data - March CPI is seen rising 0.7% on the month and 3.2% on the year. The range was 0.1% to 1.9% and 3% to 3.5%.

February's CPI rose 0.1% on the month and 3.1% on the year.

The finance ministry expects inflation to fall to around 2.5% by the end of the first half of 2002. The government's inflation target for 2002 is 2%.

                       Breakdown

Antonio Garre, economist at Grupo Analysis said the relatively good weather in March will have helped to slow growth in energy prices, which he sees coming in around at up 2% on the year.

Israel Munoz, a Caja Madrid economist, sees energy prices at around 1.9%, primarily due to dearer gasoline.

"As far as components, the rise in energy prices should be offset by the positive performance of food prices," said Julian Cubero, economist at BBVA in Madrid.

Munoz says calculating the monthly inflation figures is a bit more difficult, given that the January and February outcomes were skewed slightly by rebajas, or the twice-a-year bargain sales. "Prices will rise a bit from those (January and February) levels," said Munoz, who sees March CPI up 0.1% on the month to 3.2% on the year.

On the other end of the spectrum, Lehman Brothers' Baader said he sees monthly inflation rising by 1.9%, with the yearly figure up 3.1%. The sharp difference in the monthly figures is due, he said "to the famous fudge factor," in reference INE changing its methodology.