Spanish Inflation Accelerates, But Still Supports Gradual ECB Rate Cuts

Spanish inflation unexpectedly quickened in December, rising to 2.8% year-on-year, according to data released Monday by the national statistics agency. This marks the second consecutive month above the 2% threshold and is stronger than the 2.6% median forecast from economists surveyed by Bloomberg.

The rise in inflation, as reported by Bloomberg, is attributed to base effects, with fuel prices having dropped sharply in December 2022. Leisure and cultural goods also contributed to the increase, but to a lesser extent.The underlying inflation gauge, which strips out energy and some food prices, climbed to 2.6%, indicating persistent price pressures.

Despite this, the European Central Bank (ECB) is expected to maintain its gradual approach to easing monetary policy. ECB President Christine Lagarde recently stated that while inflation across the eurozone is likely to fluctuate near current levels in the near term, the recent spike is increasingly in the rear-view mirror.

The ECB has already cut borrowing costs by a total of 1% this year, and economists anticipate another four quarter-point cuts in 2025, bringing the deposit rate down to 2%. Most policymakers favor this gradual approach to loosening policy.

"Base effects have pushed harmonized inflation higher again in December, but they will be working in the opposite direction next month, bringing the measure back toward 2%," says David Powell, Bloomberg Economics senior economist. "In 2025, the big question for Spain's inflation outlook is how quickly price gains in services will ease. Our forecast is for the core measure to return to the ECB's 2% target in the second half of next year. But if we're wrong about the cyclical position of the economy, the risk is the descent is even slower."

Spain's success in containing inflation this year has contributed to the region's strongest economic growth. While the government has rolled back some pandemic-era price relief measures, such as VAT reductions on electricity bills, others, like free train tickets, remain in place.

Unemployment in Spain is currently hovering near its lowest level in over 15 years, boosting wages and contributing to elevated service price increases—a persistent concern for the ECB.

Spanish data is the only major eurozone economic data released this week, with public holidays delaying publication in Germany, France, Italy, and for the region as a whole until early January.