Spain | Inflation: less immediate pressure, more underlying risks

Inflation has not increased over the past two months as much as expected. This outcome is explained by the unforeseen drop in oil prices during June and by the measures introduced by the Government. Going forward, its trajectory will continue to be determined by the international context and tax policy. However, in the medium and long term, the structural increase in the costs faced by companies, along with the cyclical position of the Spanish economy, points to rates that could continue to sit above those of the eurozone as a whole.

The Consumer Price Index (CPI) recorded a year-over-year increase of 3.2% in June, lower than the 3.5% forecast by BBVA Research. The difference is mainly explained by the slower growth in the cost of both energy goods and unprocessed foods. In both cases, there have been significant and unexpected changes in the prices of key inputs for their production, such as oil and fertilizers. Both the partial reopening of the Strait of Hormuz in June and the ability of alternative producers to replace the lost supply have allowed for a reduction in the price of these goods.

For their part, the fiscal measures introduced by the Government seem to have helped, at least for the moment, to prevent a temporary shock from immediately passing through to the prices of the rest of the consumer basket. The risk was that a chain reaction would occur, in which the increased cost of key inputs at the beginning of the production process would quickly be transmitted to the price of other goods. Neither the prices of industrial goods nor those of processed foods seem to show dynamics different from those observed prior to the shock.

However, the risk of elevated inflation for a prolonged period persists. Trend measures, such as core inflation, which excludes the most volatile components, show that a significant part of the consumer basket is registering price increases close to 3%, about one percentage point above the comparable rate in the eurozone. Particularly relevant is services inflation, which has reached 3.9%. This component establishes a floor that, together with the reversal of the Government's measures and the volatility of the situation in the Middle East, limits the margin for inflation to fall in the coming months. In fact, it is expected to rise again in July, reaching 3.6%.

To the above, it must be added that the current conditions of the Spanish economy could cause the pass-through of any cost shocks to prices to be faster and more intense than in previous episodes. For example, in 2022 and 2023, there was greater idle capacity in various sectors—such as lodging—due to the impact of the pandemic. The unemployment rate stood at around 13%, whereas it is expected to fall below 10% in 2026, a level not seen in almost 20 years. This, together with unfilled vacancies that have continued to rise, indicates a tighter labor market. Furthermore, the increase in the supply of renewable energy no longer translates into lower prices given the infrastructure problems the sector suffers. Private consumption had barely recovered its 2019 level and is now expected to exceed it by 13%, pointing to stronger demand. Since then, the rising cost of housing has eroded the standard of living for a significant portion of the working population, especially the youth, and has introduced upward pressures on wage demands. This drives up labor costs, although it is not the only factor: on the one hand, Social Security contributions are also increasing due to the need to finance pensions and, on the other, the growing percentage of workers on temporary disability.

In summary, although inflation has behaved better than expected, pressures persist that could limit its decline over the coming months. This could weigh on the recovery of household purchasing power, consumption, and their perception of well-being.