Years ago, the most industrialized and wealthy countries stopped tracking inflation. It seemed there was a moment when this issue could fade from memory. Even the opposite risk, deflation, a persistent drop in general price levels that damages savings, appeared to be a distant concern.
Yet last year brought signs that inflation, the eroding force on money and savings, was returning with a force reminiscent of the late 1970s and the second oil shock. The invasion of Ukraine by Russia, which controls key energy supplies, has amplified this problem, compounded by supply chain bottlenecks. Europe responded with gas-saving plans in the summer to stockpile fuel for winter in case Moscow halted supplies, and major policy moves are anticipated in September.
Concerns about rising prices were not surprising. In the United States, July inflation cooled to 8.5 percent from 9.1 percent a month earlier, which sparked a degree of optimism in financial markets. In Spain, the rate stood at 10.8 percent. As Karl Otto Pöhl, former chair of the Bundesbank, warned, inflation is like toothpaste: once out, it is hard to put back in the tube. The rise in the consumer price index has restrained economic growth somewhat this year, with uncertainty weighing on consumer confidence and spending. A recent Bank of Spain study points to weaker expectations among lower-income households and forecasts for 2023 that hint at tougher fall and winter conditions. After the pandemic restrictions were lifted, tourism helped fuel growth in the first half of the year.
GDP growth projections have captured attention. The government expects a 4.3 percent increase when macroeconomic forecasts are updated to draft the 2023 General Government Budgets. Other forecasts cluster near this figure, while the pessimistic note comes from the General Council of Economists, forecasting 3.9 percent with a risk of a recession. A recession would mean two consecutive quarterly declines in GDP, a pattern seen in the United States during tougher cycles.
Analysts foresee a possible downturn in the final quarter of this year, with momentum from a strong tourist season carrying into the next year’s first quarter. Downside revisions to 2023 are common, and the central administration has lowered expectations to around 2.7 percent, eight-tenths below earlier estimates. The General Council of Economists remains among the more cautious voices, estimating growth between 1.7 and 1.8 percent, while Funcas and its 19 research services place the average near 2.5 percent.
Forecasts across institutions consistently flag rising consumer prices as the main divergence from GDP trends for the coming year. The phenomenon is often described as stagflation when a slowing economy coincides with elevated prices. A major question remains how inflation will evolve, with savings banks and the Funcas foundation projecting around 8.8 percent for this year. Each additional point in the CPI has meaningful cost implications, including pension adjustments and social aid tied to inflation levels, as calculated by the Bank of Spain. The government has outlined a large spending envelope for next year’s budget, reflecting transfers to Social Security and other programs that will influence fiscal policy and debt dynamics.
Officials stress that the anticipated recession may arrive more rapidly than some observers expect, yet none of the current forecasts point to a downturn as severe as a two-quarter GDP decline already seen in the United States. The Federal Reserve maintains an aggressive stance on inflation, engaging in sizable rate increases to curb price pressures. In Europe, policymakers aim to slow inflation with a cooler, more gradual approach while restoring price stability toward the two percent target.
Overall, the economic landscape remains unsettled, with inflation acting as a persistent driver of policy, consumer expectations, and fiscal decisions across North America and Europe. As the year progresses, the balance between growth, inflation, and real incomes will shape the outlook for households and businesses alike, guiding decisions on spending, savings, and investment in a climate of continued uncertainty.