Spanish inflation falls more than expected to 2.4%

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Spain’s inflation fell more than expected in August, hitting its lowest level in a year, according to official statistics. This is encouraging news for European Central Bank policymakers who are considering cutting interest rates next month.

Spain’s harmonised annual inflation rate — a standardised measure for the EU and eurozone — fell to 2.4 percent in August from 2.9 percent in July, the lowest reading since August 2023, the Institute for National Statistics said on Thursday. Economists polled by Reuters had forecast a drop to 2.5 percent.

The data also showed that core inflation, excluding energy and food, fell to 2.7 percent in August from 2.8 percent, the lowest level since January 2022. Inflation in Spain, the eurozone’s fourth-largest economy, peaked at 10.7 percent in July 2022, the highest level in decades, after energy and food prices rose following Russia’s invasion of Ukraine.

The data was released a day ahead of August’s flash figures for the euro zone. Markets expect inflation in the currency bloc to fall to 2.2 percent from 2.6 percent, a drop that would provide policymakers with more evidence that inflation is on track to hit the ECB’s 2 percent target by the end of the year.

Markets expect the ECB to cut the deposit rate by a quarter of a percentage point to 3.5 percent at its next meeting on September 12.

George Moran, an economist at Bank Nomura, said the recent drop in eurozone wage growth, which was lower than expected in the second quarter, “effectively makes a September rate cut a certainty”.

The ECB cut borrowing costs for the first time since the start of the coronavirus pandemic in June, while the Bank of England cut interest rates this month. The Federal Reserve is expected to cut borrowing costs for the first time in more than four years in September.

Inflation data for some German states also showed a sharp decline in August. The national inflation figure, due later on Thursday, is expected to show a slowdown in the annual rate to 2.1 percent in August, from 2.3 percent in the previous month.

“The Spanish and German inflation figures together suggest that eurozone inflation in August was even lower than our below-consensus forecast of 2.2 percent, and thus closer to the ECB’s 2 percent inflation target than expected,” said Melanie Debono, economist at Pantheon Macroeconomics.

According to Moran, August inflation figures “are likely to increase expectations for a rate cut in October”.

He added that lower inflation in the eurozone will underscore Philip Lane’s comments last week about the risks of higher interest rates on the inflation outlook.

The ECB’s chief economist warned at the central bankers’ meeting in Jackson Hole that “an interest rate path that is too high for too long would lead to chronically below-target inflation over the medium term”.