How the Consumer Price Index impacts your portfolio: a practical investment guide to inflation in Spain

▶ Why Should You Understand the CPI as an Investor?

If you are an investor in Spain, you have probably heard of the Consumer Price Index (CPI) in economic news. But understanding it is essential to protect your savings. When prices rise faster than your money grows, you lose purchasing power without noticing. That’s exactly what happened in 2022: Spaniards saw their investments lose value as inflation ate into their returns.

The National Institute of Statistics (INE) publishes the CPI in Spain every month, a metric that summarizes in a single number what is happening with the prices of goods and services you consume. As of December 2022, the annual variation reached 5.7%, reflecting an increase of over 5 percentage points compared to 2021. For your portfolio, this has direct implications.

▶ What Does the CPI Really Mean?

The CPI measures the average change in prices over time of a basket of 500 goods and services that represent the typical consumption of Spanish households. The INE calculates this index monthly by applying weights to each product according to its importance in household spending.

Many people confuse CPI and inflation, but they are related concepts, yet different. Inflation is the widespread increase in prices across the entire economy, while the CPI is a specific statistical measure that captures how prices evolve for selected products. Although different, the CPI is often used as the main estimator of inflation because measuring all prices would be impossible.

The CPI is broken down into sub-indices: food and beverages, housing, transportation, and others. The INE combines them to obtain the overall index and publishes data broken down by autonomous communities.

▶ What Factors Drive the CPI in Spain

Several parameters influence the evolution of the CPI. Economists consider that inflation around 2% reflects a healthy economy, but 2022 was completely different.

Changes in production costs directly impact: when wages, materials, or energy rise, the prices of goods and services increase accordingly. Aggregate demand also plays a crucial role; higher demand generates higher prices (especially visible in housing).

Exchange rate changes affect the CPI; if the euro depreciates, imported goods become more expensive. Monetary policies are decisive: when central banks lower interest rates, demand increases and the CPI rises; when they raise rates, the opposite occurs.

Government taxes and subsidies modify final prices. And supply shocks have dramatic effects: natural disasters, pandemics, or wars disrupt production and distribution, creating shortages and higher prices.

The invasion of Ukraine in 2022 was precisely a supply shock of magnitude: it cut gas supplies from Russia (main European energy supplier), generating an energy crisis that skyrocketed electricity prices and, in cascade, all goods and services. This explains why Spain’s CPI reached 10.8% in July 2022.

▶ From Theory to Your Wallet: How the CPI Affects the Spanish Economy

A high CPI destabilizes international trade: higher prices make Spanish exports less competitive globally, affecting the trade balance. It creates economic instability that discourages investments and slows growth.

It directly impacts monetary policy: with high CPI, central banks raise interest rates, which modifies exchange rates and capital flows. It reduces international competitiveness: when your goods cost more abroad, you lose market share.

All this visibly affected the Spanish stock market in 2022. The Ibex 35 fell 6.07%, while the German DAX lost 12.5% and the EURO STOXX 50 declined 11.4%.

▶ The Evolution of the CPI in Spain: 2021-2022

In 2021, the CPI started the year modestly (0.5% in January) but gradually accelerated to 6.5% in December. The boost was due to post-pandemic recovery and energy price hikes.

In 2022, the pattern was different. January closed at 6.1%, soaring to 10.8% in July (peak). The summer and autumn months marked the intensity: February 7.6%, March 9.8%, June 10.2%. Then, coinciding with the ECB’s rate hikes (summer-autumn 2022), the CPI started to decline: September 8.9%, November 6.8%, December 5.7%.

This pattern is key: it shows that restrictive monetary policies effectively control inflation, albeit with a time lag.

▶ European Comparison: How Does Spain Stand?

To compare inflation between European countries, the Harmonized CPI (HICP) is used, applying a standardized methodology across the EU. As of December 2022, Spain registered a CPI of 5.7% and an HICP of 5.4%, showing a downward trend.

In the European context, Spain is moderately positioned. Other European countries closed 2022 as follows: Poland 16.6%, Italy 11.6%, Belgium 10.4%, Portugal 9.6%, Denmark 8.7%, Germany 8.6%, Greece 7.2%, France 5.9%.

Most analysts projected that the downward trend would continue in 2023, driven by restrictive monetary policies.

▶ Protect Your Portfolio: Inflation Investment Strategies

When the CPI is high and interest rates rise, investment risks change dramatically. It is crucial to adapt your strategy.

Diversification: spread investments across asset classes, sectors, and geographies. Don’t concentrate everything in Spanish stocks.

Real assets: real estate and commodities have historically protected against inflation. The real estate market acts as a refuge during periods of high prices.

Inflation-linked bonds: these instruments generate more attractive returns when inflation rises.

Short-term investments: government bonds offer stability while avoiding long-term risks in acute inflationary contexts.

International exposure: foreign assets reduce the impact of high inflation specifically in Spain.

▶ Winning and Losing Sectors in the Face of Inflation

During periods of rising interest rates, banking benefits: interest margins widen, and bonds they issue offer more attractive yields. However, there are risks: non-performing loans increase if weakened companies and families cannot pay, eroding bank capital.

Defensive sectors like utilities and energy may be less volatile. Companies with pricing power can pass inflation onto consumers, protecting margins.

▶ Practical Conclusions for 2023 and Beyond

Although inflation is complex and markets are cyclical, some principles guide investors in inflationary times:

Diversify your portfolio across asset classes, not just stocks. Seek stable companies with proven resilience histories. Consider government bonds as stability anchors. Maintain liquidity to seize opportunities if prices fall. Never invest more than you can afford to lose, especially in extreme volatility.

The CPI in Spain peaked in 2022 but showed signs of slowdown toward the end of the year. Understanding this indicator and its mechanisms is the first step to protecting your wealth in any economic scenario.