Exactly a month after the start of the war in Ukraine, Rita went shopping and was shocked to see that the price of cooking oil had doubled, now costing more than 3 euros per litre. Over a liter of the finest olive oil available. This was a direct effect of the sudden exit from the market of one of Europe’s largest grain exporters. This is the lesser consequence of the shock wave that has spread around the world, but more violently on Europe, particularly vulnerable both to the reality of war and to the effects of the uncertainty that it generates.
Between shortages of raw materials such as cereals but also of steel for example, disruptions in supply chains, soaring prices for the transport of goods and soaring food production and logistics costs – on the energy bill, in fuel, but also fertilizer and containers, the price of which has increased three or four times over the past three months, everything has gotten worse. If you now repeat the purchase you made on March 24, the 27 items for which you paid 40.72 euros would cost you 52.47 euros. About 12 euros more for a list including fresh and processed food products, such as potatoes, coffee, croquettes, mixed salad, cheese, butter, green broth and avocado, as well as some hygiene products.
With inflation passing the 0.9% recorded in 2021 – the value that served as a reference for updating housing rents, for example, as well as for increasing salaries in the civil service or social benefits such as old-age pensions – at the current 8% (May), the highest figure in the last 29 years, life is not easy for Portuguese families who, with practically the same income, have to face much greater expenses.
According to Deco Proteste, which tracks rising prices, inflation left the basket of 63 products created from typical household consumption – fish, meat, vegetables, fruit, preserves, pasta, flour, dairy products, etc. – on average 10% more expensive. But the divergences are considerable, ranging from meat and fish, whose prices have risen by 15 to 20%, to vegetables and fruits, which have not yet reached a rise of 2% (see infographic).
Considering that around a quarter of Portuguese workers (880,000) earn the minimum wage, or even taking just over a thousand euros from the average monthly wage in Portugal (the sixth worst in Europe), more than ten euros added to each slice of 40 spent at the supermarket are difficult to integrate into the family budget. Even because it’s not just the supermarket bill that’s going up. Everything has become more expensive. With inflation at the current level and salaries that are not changing – or changing, as in the case of civil servants, by less than 1% – the increase in the cost of living is almost equivalent to losing a month’s salary per year . .
“The scenario could get even worse”
The picture is not pretty and the outlook is far from improving. Economists predict that prices will rise further before stabilizing or starting to fall. For Daniel Traça, Dean of Nova SBE, the million dollar question is even when the climb ends. And the action of central banks and governments has been directed not to arrive at a response that goes through the recession by force. “Right now, we have the cross-effect of rising energy and food goods, and we don’t know for how long. If wages are not controlled, more inflation will be generated, which will force much more drastic measures, such as an interest rate shock, to avoid an uncontrollable spiral”, he explains. The economist points to the enormous uncertainty of the moment – “just look at what was planned there three months for the month of July and where we are today” -, but believes that the situation can calm down in 2023/2024. Until then, “we will have to adapt to living a little less well “.
Also Joao Duke sees no sign of calm in the near future. “Prices will go up again”, anticipates the economist at ISEG, assuming a big scare compared to the fourth quarter of this year. “This is the time of year when gas and diesel consumption for heating skyrockets and if we get there without central Europe having made the necessary supply in time for what it will have need, there will be problems that will put pressure on prices again”, CV.
Distribution still sees no way out
The ECB itself is already admitting that the rise in prices may not stop anytime soon and that inflation, which was seen as cyclical and temporary, is expected to continue over time and force us to relearn how to live in a reality that we haven’t known for decades. . In particular because all the cushion available to agricultural and food producers, which made it possible to delay the effect of rising costs, has disappeared. With no prospect of improvement in the international situation or government support commensurate with the conditions demanded of producers and distributors – remember for example that agricultural diesel has become 60% more expensive, electricity and natural gas have tripled in price in processing, a container has more than tripled in price and the whole logistics operation is under pressure – the survival of companies forces them to pass on part of the increased expenses to products that reach families.
“Unfortunately, there are no lasting signs to say that inflation has peaked,” admits Gonçalo Lobo Xavier, anticipating that the pressure on energy prices, “not only fossil fuels, but also gas and electricity, will continue in the months to come”. O Director General of the Portuguese Association of Distribution Companies (APED) recalls what happened this week with prices in Portugal and Spain, despite the entry into force of the control measure authorized by Brussels.
“Uncertainty about the conflict in Ukraine and the measures – necessary but with serious consequences – taken by the European Union do not allow me to think that inflation will stabilize or even decrease. I fear that the pressure on the whole distribution chain to continue, especially in logistics and production. And this will raise additional difficulties which insist not to be mitigated with the policies in force so far”, underlines the official.
Another 30 euros deposit
“Inflation is undesirably high and should remain above our target (2%) for some time,” the institution’s president, Christine Lagarde, assumed this month already, revising inflation forecasts to 6.8% this year and 3.5% in 2023, thus justifying the need to “take further steps in the normalization of monetary policy”. And although the ECB’s 25 basis point interest rate hike has been postponed until July – when the asset purchase program for euro countries also ends – Euribor has already started to rise, bringing with it the maturities of indexed home loans on the six-month rate (see text on the side).
The prices of energy, petrol and diesel, which were already on an upward trend, are putting even more pressure on the pockets of families, due to the penalization of fossil fuels and the energy transition which has led, for example, the closure of coal-fired power plants in the country at the end of last year. To the effect of decarbonization which, at the beginning of February, already pushed gasoline to 1.78 euro/litre and diesel to 1.63 euro/litre, was added the war. This caused consumer prices to explode, even changing the order of the factors, diesel becoming for the first time more expensive than petrol at the end of March (2,011 euros/litre, against 1,987 on average for unleaded 95). Today, the types of fuel are almost indistinguishable: at yesterday’s average price, a 50-litre tank of petrol cost €111, a tank of diesel €108.
Which means that between February 4 and today, a gasoline car driver still spends 20 euros per deposit; on diesel, the difference is almost 30 euros.
Who benefits from inflation? for tax revenue
With soaring prices, there is an obvious positive effect: it inflates the coffers of the State, thanks to higher tax revenues. If a single apple costs more in the supermarket, the VAT rate applied to it has a higher base, so it represents a few cents more for the tax authorities. Multiply this effect by all we buy daily and it’s easy to see how much tax revenue rises in the wake of inflation – as long as consumption levels are maintained.
In Rita’s supermarket account, the 6.76 euros in VAT paid on the 40 disbursed went from the 52 euros that I would spend today with the same purchases to 9.6 euros in taxes.