Spanish Inflation Up for Third Month as Energy Aid Ends

Spanish inflation continued to rise for the third consecutive month as the government reduced support to combat the energy crisis, causing prices to increase. According to data published on Thursday, inflation in May reached 3.8% compared to the previous year. This is higher than April’s 3.4% and slightly above the median estimate of 3.7% from a Bloomberg survey of economists. Excluding energy and certain food costs, core inflation also rose to 3% from 2.9%. Germany experienced a similar acceleration in inflation, with the introduction of a cheap public transport ticket last year leading to a price growth of 2.8% this month. Data for the entire 20-nation euro zone, which will be released on Friday, is also expected to show an increase to 2.5%.
The upcoming European Central Bank meeting is unlikely to change its plan to lower the deposit rate from the current record high of 4%. However, policymakers will exercise caution in approving further cuts, despite expectations of disinflation in the coming years.

According to Bloomberg Economics, the recent increase in Spain’s harmonized Consumer Price Index (CPI) in May should not be a cause for concern. The rise is primarily attributed to unfavorable base effects from energy, and there is expected to be more positive news regarding the core measure. The underlying price gains have been steadily declining and are anticipated to fall below 2% later this year, indicating that the risk of persistent inflation has largely diminished.

The market has already priced in two rate reductions for this year, with a one-in-three chance of a third cut. ECB Chief Economist Philip Lane stated last week that monetary policy will need to remain restrictive for the remainder of 2024.
Spain’s economic growth is outpacing most of the euro area, which could potentially drive up inflation. However, the government’s plans to pass a budget for 2024 have been put on hold, and a political deadlock in parliament has hindered Prime Minister Pedro Sanchez’s ability to enact legislation.

According to Bloomberg Economics’ Nowcast, June’s inflation is projected to slow down to 3.5% based on the latest data. The model accurately predicted the outcome for May.