It’s not just on the tennis courts that Spain is once more excelling; in an age where everyone worries about rising prices, Spain enjoys one of the lowest inflation rates on the planet.
In the year to June, inflation as measured by the Consumer Price Index fell to just 1.9pc. Alone in Europe, price increases are actually below the 2pc target pursued by both the European Central Bank and the Bank of England.
Nor does this achievement have anything to do with the usual cause of diminishing inflationary pressures – a recession. For now, Spain also enjoys a relatively resilient labour market and reasonable growth.
Let’s not stretch the analogy too far, but compare Spain’s inflation rate to the 13.7pc recorded for the same month by Novak Djokovic’s native Serbia. No contest, it might be said, following Djokovic’s defeat last weekend on Wimbledon’s centre court by Spain’s Carlos Alcaraz.
Not that Spain’s apparent success in getting inflation back to target seems to have done the incumbent government any good. Prime Minister Pedro Sanchez is trailing badly in the polls and faces defeat by a coalition of Right leaning parties in next week’s snap general election. Sanchez’s mix of price controls, subsidies and handouts is unlikely to save him.
Therein lies a possible message for Rishi Sunak here in Britain.
Relatively competent management of the economy provides no guarantee of election success. And even judged on the economy, Sunak is plainly struggling.
Both of his two economic pledges – to halve inflation by the end of the year, and to get growth going again – look to be in some danger.
Among major advanced economies at least, Britain’s post-pandemic spike in inflation is proving both bigger and more prolonged than elsewhere, prompting a deeper fall in real incomes and a more painful cost of living squeeze.
Why is this, and to what extent is Brexit to blame? Merely to ask this latter question is to invite a tirade of condemnation by committed Brexiteers. Even among otherwise interested economists and policymakers there is a consequent tendency to avoid it altogether.
The last Bank of England Monetary Policy Committee Report, for instance, didn’t mention Brexit once by way of excuse for the Bank’s own failure to control inflation.
Yet the unarguable truth is that it is bound to have had some effect, even if quantifying it is virtually impossible. Despite this difficulty, researchers at the London School of Economics have taken a stab, and particularly uninstructive this much quoted study is, too.
According to an update of the research published in May, UK food prices rose by an average of 25pc between December 2019, when Britain left Europe’s single market, and March this year. “Our analysis suggests that in the absence of Brexit this figure would be 8 percentage points (30pc) lower”.
The cost of Brexit for food prices alone is thereby judged to be a spuriously specific £6.95bn, or £250 per household. This figure is arrived at by measuring the difference in prices between products more exposed to imports from the EU versus those less exposed over time.
Before Brexit, these products had similar price trends. Yet after Brexit, according to the LSE research, there has been a notable relative increase for more exposed products, which has continued into 2023.
Perhaps so, but just answer me this. If it were true that the effects of Brexit were as big as suggested, how come that until the last couple of months, food price inflation in Germany was almost exactly the same as the UK? So I’m sceptical.
To deny any Brexit effect at all is nonetheless ridiculous. The cost and hassle of doing business with Europe, both import and export, has manifestly increased significantly, particularly when it comes to food, which now faces some formidable non tariff barriers to trade.
Meanwhile, there appears to have been little or no countervailing dividend from access to supposedly cheaper, global sources of food supply.
The other inflationary effect of Brexit is even less easy to quantify; loss of labour supply.
Surging levels of net immigration since Brexit might suggest a contrary effect, but the makeup of this influx has been very different from the sort of relatively cheap and abundant supply of casual migrant labour from Eastern and Southern Europe that used to prevail. In particular, there have been lots of students, and lots of non working relatives in the numbers.
In any case, acute staff shortages across sectors have both driven up wages, and in some sectors, notably hospitality, reduced output. Some firms have compensated for any reduction in business caused by lack of staff by pushing up prices so as to maintain their overall level of sales.
None of this is to argue that Brexit is the main component in Britain’s relative poor inflationary experience.
Spain is in any case very much an outlier; there are plenty of countries both within the eurozone and the wider European Union with an even worse inflationary problem than our own, albeit all of them much smaller ones.
And France has only managed to sustain a relatively low rate of inflation through costly price controls. But that Brexit is a factor is undeniable.
What, however, is also true is that the Bank of England should have recognised this exposure to higher prices sooner and acted accordingly. Instead, it exacerbated the problem with excessive money printing.
Demand side stimulus was recklessly applied to an economy whose capacity had plainly been harmed by the deprivations of the pandemic and the teething difficulties of Brexit.
Inflation has been above the 2pc target since July 2021, well before Putin’s murderous invasion of Ukraine, yet the Bank of England didn’t begin its tightening cycle until December that year. There were two miscalculations that instructed this tardiness.
One was that the Bank of England anticipated a big rise in unemployment once furlough subsidies had ended. This didn’t happen. The Bank also adopted a cautionary approach to the Omicron variant of Covid, which as it turned out was relatively harmless and didn’t in the end prompt further lockdown measures.
As it is, we have been left with very high, and at the last count still rising, “core inflation”, a measure that excludes volatile food and energy prices. Around half of the current strength in headline inflation is accounted for by energy and food prices, which will start to fall out of the equation in the months ahead.
We therefore face the prospect of “core inflation”, which gives a better idea of domestically generated inflationary pressures, exceeding headline inflation later this year.
This inversion has already happened in Spain. Lest we get carried away in thinking of Britain’s inflationary experience as particularly poor by European standards, core inflation remains elevated across the Continent, even if mainly falling there, against still rising here.
A stronger pound, both against the dollar and to a lesser extent the euro, ought to help in this regard, but it comes at the cost of much higher interest rates.
Quite how much higher they need to go to fully exorcise inflation remains an open question.
The Bank of England faces both ways; on the one hand it says it is serious about quelling inflation whatever the costs, but on the other it still hopes to apply the therapy without inducing a recession, a big rise in unemployment, and a house price crash. Is a soft landing still possible? Most economists would say no, but what do they know?
Now read: If you pin Britain’s inflation woes on Brexit, then explain Sweden
This article is an extract from The Telegraph’s Economic Intelligence newsletter.Sign up hereto get exclusive insight from two of the UK’s leading economic commentators – Ambrose Evans-Pritchard and Jeremy Warner – delivered direct to your inbox every Tuesday.
