Spanish inflation slowed to below the 2% level targeted by the European Central Bank, a small victory for Frankfurt officials battling to tame cost increases across the wider euro region.
Consumer prices rose 1.6% in June from a year earlier, down from 2.9% the previous month, as increases in energy and food bills continued to ease, according to the country’s statistics agency. That’s the weakest pace of inflation in more than two years.
ECB officials won’t take much reassurance from the data in the region’s fourth-biggest economy, despite the dramatic improvement. Policymakers remain perturbed at the underlying pace of price growth in the euro area, which is likely to have re-accelerated in a report due Friday.
“The evolution of core inflation, of underlying inflation — that, I think is very relevant in the present circumstances,” ECB Vice President Luis de Guindos told Bloomberg Television on Wednesday. “Perhaps, you know, core inflation is going to be stickier than we believe.”
In Spain, the underlying measure, based on a different index and basket than the euro-zone’s gauge, slowed to 5.9% in June from 6.1%.
Guindos and his colleagues may take comfort from a dramatic drop in how households anticipate price developments across the region. Consumers’ inflation expectations dropped to the lowest since 2016 in a gauge compiled by the European Commission released on Thursday.
What Bloomberg Economics Says...
“It would be premature to declare victory over inflation. As favorable base effects fade in coming months, the headline rate will steadily climb up again, to just below 4% by the end of the year. It’s not until mid-2024 that the ECB’s 2% target is sustainably reached.”
—Ana Andrade, European economist. For full note, click here
Italian data on Wednesday showed a drastic drop in the headline index. At 6.7% however, inflation there remains far above the ECB’s goal. France may also report a slowdown in price growth on Friday.
Later on Thursday, officials in Germany, Europe’s biggest economy, are expected to reveal an acceleration. Numbers released earlier from North Rhine Westphalia, the country’s largest state, showed an increase of 0.5 percentage point to 6.2% in the inflation rate, measured on national criteria. Other reports from across the country consistently showed pickups too.
Those data will lead up to the publication of numbers for the euro region as a whole. Economists anticipate headline rate of inflation fell to 5.6%, while the underlying measure rose to 5.5%.
A former Spanish finance minister, Guindos said that another ECB rate increase in July is a “fait accompli,” while there’s an open question on what to do at the subsequent meeting in September. That’s the focus of debate among officials at present.
Money markets are holding onto wagers the deposit rate will climb as high as 4% by year-end with the bulk of the increases expected to happen at the policy decisions in July and September.
Spanish Economy Minister Nadia Calvino said last week that Spain may not need more rate hikes, though she acknowledged that the ECB “is looking at Europe as a whole.”
Despite slowing price growth there, Prime Minister Pedro Sanchez, who is trailing in polls ahead of a July 23 snap general vote, on Tuesday extended an anti-inflation package of €3.8 billion ($4.2 billion) in tax cuts and subsidies.
--With assistance from Ainhoa Goyeneche, Joel Rinneby and James Hirai.
(Updates with expectations survey in sixth paragraph)
