Evolution Of The Inflation Rate Of Spain Between The Years 2000-2018 Against The Eu Area

This assignment consists of a short report over the evolution of the inflation rate of Spain between the years 2000-2018 against the Eu Area. Using descriptive statistics and techniques I shall give a detailed analysis of the changing inflation rates during this period.

Inflation is the economic term for the increase in the price of goods and services over time. As price rises, your money buys you less, therefore inflation reduces your standard of living. The inflation rate is the percentage increase or decrease in prices during a specific period. It tells you how quickly prices rose or fell during the period. (Investopedia, 2019)

CPI, Consumer Price Index, is used to measure inflation. It is a measure that examines the weighted average of prices of a basket of goods. It was introduced to enable comparisons of prices. (Blackwell, 2009)

The percentage change of the inflation rate of Spain versus the 19 countries of the Eu area is displayed of the graph above.

In Relation to the data regarding Spain, the mean interest rate is 2.2. This is calculated by the sum of the values divided by the number of values. In relation to the data regarding the 19 countries in the Eu Area, the mean of the data is 1.8.

The mode is a descriptive technique which show the most frequently occurring value. The data in relation to Spain only is multimodal. There are several modes. The modes of this data are -0.2, 3.0, 3,4. The mode of the data regarding the other 19 countries in the EU is 2.2. This data has only one mode and is therefore unimodal.

As shown in the graph, the minimum point, the point at which the inflation rate was at its lowest, in Spain is -0.5. This occurred in 2015. The maximum inflation rate occurred in 2008, this percentage was 4.1. By subtracting the minimum percentage from the maximum percentage, the range of the data can be found. The range of this data is 4.6.The Inter Quartile Range (IQR) is a technique which shows the range of the middle 50% of the data. In order to find the IQR, the data must first be ranked. The IQR on the data for Spain only is 2.0.

For the 19 countries in the Eu Area, it is clear to see from the graph above that the minimum inflation percentage is 0.2, this occurred in 2015 and in 2016. The maximum point, the point at which inflation was at its highest was 3.3. This rate occurred in 2008. By subtraction, the range of this data is 3.1 and the Inter Quartile Range for this set of data is 1.0.

The variance is the measure of how far each number in the data set from the mean. The variance of the data of Spain is 2.09364. The standard deviation is a statistic that measures the dispersion of a data set relative to its mean. It is calculated as the square root of the variance. The Standard Deviation of this set of data is 1.446957.

The variance of the data for the EU area is 0.76421 and the standard deviation for this set of data is 0.87419.

According to the data set, the inflation rate in Spain remained generally steady between the years 2000-2006, the range of this data being only 0.6. This is because during the late 1990’s and early 2000’s Spain enjoyed rapid economic growth and became the 5th largest Eu economy. Up until the year 2006, Spain had 15 years of uninterrupted economic growth. Other than Ireland, in history, this is the longest continuous expansion of an economy in modern times. Between 1996 and 2007, Spain reformed its labour markets, lowered its interest rates and unemployment. The growth in the Spanish economy doing this period encouraged a boom in the property market. This boom contributed significantly to Spain’s economic success and put a downward pressure on inflation. (Knight, 2012) (Stratfor, 2009)

In 1999, when the euro was launched, interest rates fell. Banks, property developers and ordinary people borrowed and this fuelled a large-scale property boom. In 2006, Spain built 800,000 new homes, more than Italy, Germany, France and the UK combined. When the European Central Bank took over interest rates in Spain, the rates were low. Banks also started offering longer mortgages. This meant that even if housing prices were high, monthly repayment of the mortgage could be low. This increased the demand for housing during this time. The real estate market in Spain entered a boom. Between 1996 and 2007, Spanish property prices almost tripled. (Pettinger, 2019)

During this time, immigration into the country increased. Because of the large-scale construction of houses and apartment, Spain created more jobs during this time then the rest of the eurozone combined. Spain received a large number of immigrants from developing countries. This immigration, and as a result, and increasing demand for housing, gave a further boost to its already rising housing boom.

As shown in the histogram above, the inflation rate in Spain between the years 2000-2006 was higher than the 16 countries of the Eu Area. Oil prices during this time helped to widen the gap in inflation rates. Fuel taxes were lower in Spain than in other Eu countries so oil prices effected Spanish inflation more. According to a study publishes in the journal Economic Modelling, when fuel prices are the same in every Eu country, Spain is affected more. “Our Consumer Price Index in more heavily effected” – Alvarez, co-author of the study and a researcher in the Bank of Spain’s Research Department.

The maximum point of the set of data for Spain occurred in 2008. The inflation rate for this year was 4.1. In 2008, Spain was badly affected by the global financial crisis. During this year there was a peak in oil prices which caused cost-push inflation. As a result of the global financial crisis, the Central bank was more reluctant to cut interest rates. The Spanish housing market collapsed and Spain entered a recession. The global crisis prevented buyers from paying back their housing loans. There was strong economic downturn, an increase in unemployment and bankruptcy of major companies. The Spanish government had to borrow to deal with the collapse of the property market. During this time Spain also had the worst unemployment rate in the eurozone, 13.9%. (Ycharts.com, 2008). During its recession, its lack of internal resources forced Spain to import fossil fuels. This added pressure to the inflation rate. (Amadeo, 2019)

Inflation rates in the EU area followed a similar path, with inflation peaking in 2008 at 3.3. The Financial Crisis was seen all over Europe. The main causes of this crisis were The Great Recession 2008-2012 and the real estate market crisis in many countries of the Eu. The deregulation in the financial industry was also to blame. Banks engaged in hedge fund trading with derivatives. Banks then demanded more mortgages to support the sale of these derivatives. This resulted in the Financial crisis. (Silver and Zieschang, 2009)

There was a spike in energy prices in 2008. Inflation peeked at 5.3 in July. The commodity prices collapsed in September 2008, as the Global Financial Crisis hit.

In 2009, Inflation rates in Spain fell from 4.1 to -0.3. Similarly, in the Eu area inflation rates fell from 3.3 to 0.3. Inflation rates in Spain and throughout Europe were falling. The main factor behind the drop in the inflation rate was cheaper electricity and gas bills. Falling energy prices continued to cut the cost of living. (Shelving Rock, 2018)

After 2009, there was a period where inflation rate rose. The inflation rate in Spain and the Eu Area followed the same path between 2010-2013. In a recession, you would expect a fall in the interest rate due to a lower demand. However, during 2012 there was a double-dip recession with low economic growth but rising inflation. This was because of a fall in the value of the pound. This increased the cost of imports. Also, there was a rise in oil and hence petrol prices. (Pettinger, 2017)

The Spanish economy endured almost 3 years of negative inflation from 2014-2016. The minimum inflation rate reaching -1.3 in January 2015. Spain’s National Statistics Office says that this is “almost entirely” due to the falling cost of electricity and petrol. The Eu area’s inflation rate also fell during this period however on average in did not reach negative figures. (Buck, 2014)

In recent years the inflation rates of Spain and the Eu Area have risen. This is because of demand pull inflation. The Spanish economy is improving. The economy has outperformed expectations. According to Oscar Arce, The Bank of Spain’s head of research, the economy has demonstrated “greater strength than anticipated”. It is expected that the current expansionary stage will continue until 2021. (Maqueda, 2019)