Spanish inflation slowed more than expected in December, raising expectations of easing price pressures in the eurozone.
Spanish consumer prices rose 5.8% in the year to this month, according to preliminary figures released Friday by the national statistics office. The figure was down from 6.8% the previous month and a steeper fall than economists had expected.
The Spanish data are the first December inflation figures for a eurozone member state. If similar declines occur elsewhere, European Central Bank policymakers could opt to slow the pace of rate hikes faster than markets expect.
German data is released on Tuesday and is expected to show inflation slowing from 10% to 9%. Price pressures in Italy should also have moderated, while figures for the Eurozone as a whole should show inflation returning to single digits. Economists are predicting a fall to 9.7% in December from 10.1% the previous month when data for the single currency zone is released next Friday.
Although headline inflation is currently declining in several major depressions, the underlying price pressures persist. Core inflation in Spain – a measure that excludes energy and food inflation – it accelerated to 6.9% in December from 6.3% the previous month, the highest since records began in 2003.
“Services prices will continue to show robust monthly momentum, keeping core eurozone inflation close to 2022 highs,” said Yaroslav Shelepko, economist at Barclays, adding that he expected higher inflation. “increasing divergence” between global and basic measures as the “theme” for 2023.
Faced with the highest inflation ever recorded, the ECB increased rates by 2.5 percentage points during 2022, from minus 0.5 to 2%. Inflation peaked at 10.6% in October.
The Governing Council of the ECB will then meet to set policy on February 2. ECB President Christine Lagarde hinted after rate setters voted in December that a half-point rise in borrowing costs was likely. However, steeper-than-expected inflation cuts would increase the odds of the ECB switching to quarter-point hikes early next year.
The Spanish reading was lower than forecasts of 6% by economists polled by Reuters and marked the fifth consecutive decline from the peak of 10.8% recorded in July.
Nadia Calviño, Spain’s deputy prime minister and economy minister, called the data “very positive”, noting that Spain’s inflation rate had now fallen by 5 percentage points in five months. “There may be increases, but the trend is for inflation to continue to fall in 2023,” she told Cadena Ser radio.
Spain has taken several measures to limit the rise in energy costs this year, including the so-called “Iberian exception” which decoupled the price of electricity from that of gas by capping the wholesale costs of the gas paid by electricity producers.
Madrid has also introduced a block fuel subsidy which has 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 consumers from next year.
Calviño said: “All the measures we have put in place are aimed at containing the rise in prices and we see that they are proving effective. The drop in energy is the fundamental factor that explains the drop in inflation.
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, Spain’s Socialist Prime Minister Pedro Sánchez announced this week a reduction in the sales tax from 4% to zero for basic foodstuffs, including bread, milk, cheese, fruits and vegetables.
Calviño described the measures as sending a “very powerful” signal that the government would keep the cost of staple foods under control.
The package included a one-off payment of €200 for around 4 million households and was the third round of support announced this year, bringing the combined cost to the government to €45 billion.
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