In March, Spanish inflation picked up pace as the government phased out support measures that had been helping to mitigate the impact of skyrocketing energy costs. The latest data showed that consumer prices rose by 3.2% compared to the previous year, slightly below economists' expectations of 3.3%. Additionally, core inflation, excluding volatile energy and food costs, also decreased more than anticipated to 3.3% from 3.5%.
This trend is reflective of the broader trajectory seen across the euro zone, where inflation has been gradually moderating. The European Central Bank, whose target inflation rate is 2%, is likely to consider reducing its deposit rate from the current record high of 4% in June, as officials in Frankfurt converge on this decision.
Looking ahead, inflation in the euro zone is projected to ease further, with estimates suggesting a decline to 2.4% this month. Recent data from Spain could push this estimate lower, potentially falling to as low as 2.2%. The official reading from Eurostat is due on April 3, with upcoming reports from France and Italy expected to provide further insights into the region's inflation dynamics.
Despite the uptick in inflation, the market remains unfazed, with expectations of a rate cut from the ECB in June followed by at least two more quarter-point decreases by the end of the year. The euro and regional government bonds showed a steady response to Spain's inflation data, indicating no significant shift in the rates outlook.
Spain's decision to gradually remove subsidies, particularly in sectors like transportation and agriculture, has contributed to the inflation uptick. However, certain supports, such as discounted public transportation, have been maintained. Looking ahead, the strong tourism outlook for the country suggests that price pressures are likely to persist in 2024, with services inflation remaining elevated above 3%.
Despite these challenges, analysts at Oxford Economics foresee core inflation gradually moderating to 2% next year, as the economy adjusts to evolving market dynamics. Overall, while inflationary pressures persist, the gradual unwinding of government support measures is expected to bring a semblance of stability to the pricing environment in Spain and the wider euro zone.