Prices, markups and wages: inflation and its distributive consequences in Spain, 2021-2023

• Using the Observatory of Firms’ Margins, we confirm an increase in aggregate markups in Spain during the recent inflationary episode. • The main factor explaining price increases is firms' pass-through of higher input costs to protect their profits. The direct effect of markup increases has been quantitatively less important, and that of unit labour costs negligible. • Inflation has had huge distributional consequences and there is space for non-inflationary wage increases. • While fiscal and regulatory measures have effectively curbed the inflation rate having an expansive effect, restrictive monetary policy is inappropriate and costly. This article analyses the recent inflationary experience in Spain (2021-2023), focusing on the functional income distribution, the evolution of markups and real wages, and the economic policies implemented. We rely on the conflict theory of inflation and touch upon recent debates on of sellers' inflation. Using the Observatory of Firms’ Margins, we confirm an increase in aggregate markups. Nevertheless, the main factor explaining price increases is firms' pass-through of higher input costs to protect their profits. The direct effect of markup increases has been quantitatively less important, and that of unit labour costs negligible. Therefore, inflation has had huge distributional consequences and there is space for non-inflationary wage increases. While fiscal and regulatory measures have effectively curbed the inflation rate having an expansive effect, restrictive monetary policy is inappropriate and costly.