Spanish inflation slows more than expected to 5.8% – Financial Times

Line chart of annual percentage change on the consumer price index showing that inflation in Spain is slowing more than expected

Spanish inflation slowed more than expected in December, raising expectations that price pressures are easing across the eurozone.

Spanish consumer prices rose 5.8 percent in the year to this month, according to preliminary figures released Friday by the National Bureau of Statistics. The figure was lower than the 6.8 percent in the previous month and a sharper drop than economists had predicted.

The Spanish figures are the December 1st inflation figures for a eurozone member state. If similar declines occur elsewhere, policymakers at the European Central Bank may choose to cut the pace of interest rate hikes faster than markets expect.

German data is due on Tuesday and is expected to show inflation slowing from 10 percent to 9 percent. Italian price pressures are also expected to have eased, while data for the eurozone as a whole is expected to show inflation returning to single digits. Economists forecast a drop to 9.7 percent in December from 10.1 percent in the previous month when data for the single currency zone is released next Friday.

While headline inflation is now declining in several major economies, underlying price pressures remain. Core inflation in Spain — a measure that excludes energy and food inflation — accelerated to 6.9 percent in December from 6.3 percent in the previous month and the highest since records began in 2003.

“Services prices will continue to show robust monthly dynamics, keeping eurozone core inflation close to its 2022 high,” said Iaroslav Shelepko, an economist at Barclays, adding that he expected “growing divergence” between the main and core actions as a “theme” for 2023.

Faced with the highest inflation ever, the ECB increased rates by 2.5 percentage points in the course of 2022, from minus 0.5 to 2 percent. Inflation peaked at 10.6 percent in October.

The Governing Council of the ECB will then meet on 2 February to adopt policy. Christine Lagarde, president of the ECB, hinted after the vote of the rate setters in December that a half-point increase in borrowing costs was likely. However, a stronger-than-expected decline in inflation would increase the likelihood of the ECB switching to quarter-point increases early next year.

The Spanish reading was lower than the 6 percent forecast by economists polled by Reuters, marking the fifth straight drop from a peak of 10.8 percent recorded in July.

Nadia Calviño, Spain’s deputy prime minister and economy minister, hailed the data as “very positive” and noted that inflation in Spain had now fallen by 5 percentage points in five months. “There may be upswings, but the trend is that inflation will continue to fall in 2023,” she told Cadena Ser radio.

Spain has taken several measures to limit the increase in energy costs this year, including the so-called “Iberian exception” which decoupled the price of electricity from that of gas by limiting the wholesale cost of gas paid by power generators.

Madrid also introduced a general fuel subsidy that reduced petrol and diesel prices by €0.20 per litre, although it expires on December 31 and will only be available to business consumers from next year.

Calviño said: “All the measures we have taken are aimed at containing the price increase and we see that they are proving effective. The decline in energy is the fundamental factor explaining why inflation is falling.”

The country has also benefited from its historically low dependence on Russian gas compared to Germany and other parts of Northern Europe.

In a new €10 billion package of measures to ease the cost of living, Spanish Socialist Prime Minister Pedro Sánchez this week announced a sales tax cut from 4 percent to zero for staple foods such as bread, milk, cheese, fruits and vegetables .

Calviño described the measures as sending “a very strong measure” that would keep the cost of everyday staples in check.

The package included a one-off payment of €200 for around 4 million households and was the third round of aid announced this year, bringing the combined cost to the government to €45 billion.

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