Spanish inflation slows more than expected to 5.8%

Spain’s inflation rate came in lower than expected in December, raising expectations for a rate cut in the eurozone.

Consumer prices in Spain rose by 5.8 percent in the year to this month, according to preliminary figures published by the country’s statistics office on Friday. The figure was down from 6.8 percent the previous month and a bigger fall than economists had predicted.

Spain’s data are the first figures for December for eurozone member states. If a similar collapse occurs elsewhere, then policymakers at the European Central Bank may decide to lower interest rates faster than markets expect.

German data is out on Tuesday and is expected to show a drop in prices from 10 percent to 9 percent. Italian inflation pressures are also expected to moderate, while figures for the rest of the eurozone are forecast to show inflation returning to single digits. Economists forecast a fall of 9.7 percent in December from 10.1 percent in the previous month when data for the single currency area is released next Friday.

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Although inflation is now slowing in most economies, price pressures persist. Spain’s inflation – a measure that excludes increases in energy and food – rose to 6.9 percent in December from 6.3 percent the previous month and the highest since records began in 2003.

“Labor prices will continue to show monthly strength, keeping eurozone inflation close to the 2022 peak,” said Iaroslav Shelepko, an economist at Barclays, adding that he expected “significant divergence” between the headline and key figures as a “headline” for 2023.

Faced with higher inflation, the ECB raised rates by 2.5 percent through 2022, from 0.5 to 2 percent. Inflation peaked at 10.6 percent in October.

The governing body of the ECB will meet again to set a policy on February 2. Christine Lagarde, the president of the ECB, said after the vote of the December-setters that the rise by half of the borrowing costs may be possible. However, a larger-than-expected fall in inflation would raise the chances of the ECB changing to a quarter-point rate hike early next year.

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The Spanish reading was lower than the 6 percent estimate of economists polled by Reuters and marked the fifth consecutive decline from the 10.8 percent rate registered in July.

Nadia Calviño, Spain’s deputy prime minister and finance minister, celebrated the “very good” news, saying that the inflation rate in Spain has dropped by 5 percent in five months. “There may be increases, but what is happening is that inflation will continue to decline in 2023,” he told Cadena Ser radio.

A line chart of the annual % change in the consumer price index shows that Spain's inflation rate is lower than expected.

Spain has taken steps to reduce the increase in the price of electricity this year, including the so-called “Iberia exception” which affected the price of electricity from gas by recording the price of gas supplied by electricity.

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

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Calviño said: “All the measures we have implemented are aimed at raising prices and we see that they are working well. Decline in power is the most important factor that explains why inflation is falling.

The country has also benefited from being more dependent on Russian gas than Germany and other parts of northern Europe.

In a new €10bn package of austerity measures, Spain’s Socialist Prime Minister Pedro Sánchez this week announced a reduction in sales tax from 4 per cent to zero on essential foods including bread, milk, cheese, fruit and vegetables.

Calviño explained that this is sending a “very strong signal” that the government will lower the price of food.

The package included a one-off payment of €200 for some 4mn families and was the third aid package announced this year, taking the total state budget to €45bn.

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