Inflation, War, and Energy: Spain’s Price Dynamics in a Turbulent Era – A 2024 Perspective

Inflation and energy prices have been attributed by Spain’s head of government, Pedro Sánchez, to Russia’s invasion of Ukraine, a statement he delivered in Congress on March 9, thirteen days after the invasion began. By October 2021, inflation was already reaching multi-decade highs with a 5.4% reading in the year prior.

After the war started, the Consumer Price Index continued to climb, rising from 7.6% in February to 9.8% in March, and by June Spain registered its highest inflation in 37 years at 10.2%. That month marked the first time the double-digit threshold had been crossed since April 1985.

War effects, but also pandemic

Economist Ernest Pons, PhD in Economics and Business Sciences and professor at the University of Barcelona, offers two principal explanations. First, a demand shock stemming from the gradual reopening of activity after pandemic restrictions. Montserrat Guillen, who teaches Quantitative Methods in Economics at UB, concurs, noting that activity is expected to rebound as restrictions ease.

Eurozone inflation climbed to a record level of 8.9% in July

The second factor, according to Pons, is the impact of the Ukraine conflict. He explains that the war raises price pressures because businesses may rush to secure supply and prefer to contract now rather than risk shortages later, creating an environment where prices could stay elevated. Guillen adds that the situation could worsen.

As Pons puts it, inflation rose for two main reasons, with the war being a significant, but not sole, contributor. While earlier episodes showed inflation upticks, they were much more moderate. Guillen cautions that only part of the current rise can be attributed to Ukraine, pointing to grains and energy costs as key drivers.

fuel reduction

Among the products most affected by the price surge were fuels, electricity, and to a lesser extent, food and soft drinks, according to the latest data from the National Statistics Institute.

Gasoline and diesel price spikes occurred at the outset of the conflict. Although prices have eased somewhat recently, they remain higher than pre-war levels. In response, the government introduced a 20-cent-per-liter fuel discount, a measure that is set to continue through December 31.

According to Ernest Pons, the discount produced a noticeable effect on the price paid by consumers, but there is always room for companies to increase markups within the allowed margin. He cites studies showing a typical rise of 5 to 7 cents per liter in some cases.

Despite the fall in gasoline prices, inflation reached 10.8% in July

Even as gasoline price relief appeared to ease some pressure, inflation remained high. Observers noted that the discounts did not trigger the dramatic 20-cent jumps some feared, and in many instances the bonus left consumers with modest, real savings. The National Markets and Competition Commission reported that gas stations generally did not raise prices to exploit government support.

gas source

The shift in Spain’s stance toward Western Sahara contributed to a broader energy shock, affecting relationships with Algeria, a major natural gas supplier. Algeria ensured supply despite a disrupted gas pipeline, but EU members faced concerns about possible interruptions as energy demand remained high amid the war in Ukraine. The electricity price reached historic highs, prompting the government to implement the Iberian mechanism from June 15 to cap gas costs and reduce electricity prices. Pons notes that while the mechanism has been effective, it remains a subject of ongoing refinement; analyses from academic sources underscore that the calculation is intricate.

Spain’s energy strategy also reflects regional dynamics, with close attention paid to securing gas and electricity during a time of crisis.

Spain is not an anomaly

Inflation trends in Spain align with neighboring countries, driven by several common factors. Pons points out that the underlying causes are shared across several European economies. In June, the Harmonized Consumer Price Index placed Spain at about 10%, closely tracking the European Union average around 9.6%, according to Eurostat data.

How long will it last?

Late July brought comments from Nadia Calviño, the First Vice-President and Minister of Economic Affairs and Digital Transformation, suggesting that inflation would stay high through the summer but ease into autumn. Pons remains cautious, noting that predicting the duration of the high-inflation period is difficult. He expects the peak to occur around July or August, with a possible decline to the 7–8% range by year-end. Yet he emphasizes that forecasts are inherently uncertain, especially given the Ukraine conflict, rate hikes, and potential policy changes that can shift the trajectory unexpectedly.