(March 27): Spanish inflation jumped to its highest level since June 2024 due to the Iran war, supporting the case for the European Central Bank (ECB) to raise interest rates.
Consumer prices rose 3.3% from a year earlier in March, data on Friday showed. That’s up from 2.5% in February but short of the 3.8% median estimate in a survey of economists. The surge was driven by costlier fuel, statistics agency INE said.
Soaring energy prices brought on by the conflict in the Middle East are stoking fears of an inflation spike like the one that struck four years ago. Traders see the ECB stepping in and some officials are already pondering a hike in borrowing costs at next month’s meeting.
President Christine Lagarde, however, said this week that she and her colleagues won’t act without sufficient information on the size and persistence of the shock.
Spain is the first major euro-area economy to report price data for this month, with the 21 nation bloc itself only releasing its reading on March 31. The latest ECB outlook envisages prices will rise 2.6% this year, surpassing the 2% target.
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A separate ECB survey published on Friday showed inflation expectations among euro-area consumers were falling as the war began. Prices were seen rising 2.5% over the next 12 months and the next three years — both down from the previous month, according to the Feb 5-March 3 poll. For five years ahead, expectations were unchanged at 2.3%.
The ECB is focusing intensely on such findings as it tries to determine whether the gyrations in energy markets will spill over into consumer prices more broadly. Officials say they won’t allow a repeat of the 2022 shock that followed Russia’s invasion of Ukraine.
Vice president Luis de Guindos said on Thursday that if expectations start to de-anchor from target, the ECB “will have to react”.
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New forecasts on Friday from the Bank of Spain envisaged faster inflation, reaching as high as 5.9% this year in a severe scenario.
The war will have a negative impact of 0.4 percentage points on GDP in 2026, but the package of tax cuts approved by the government this month will add 0.3 of a point to expansion, according to the central bank report. Combined with recent stronger-than-expected growth, that takes this year’s projection to 2.3%, compared with 2.2% from the previous forecast.
“A greater intensity of the conflict and its prolongation over several months — a possibility that, in light of the most recent developments, appears increasingly likely — would keep energy commodity prices elevated, raising the probability that second-round effects on wages and prices along the production chain will materialise,” the Bank of Spain.
Last week, governor Jose Luis Escriva had already warned that “the situation is very uncertain and highly volatile, and what we must do is continue assessing a wide range of information”.
“Higher energy prices drove the sharp rise in Spain’s inflation, in the first clear sign of the toll the Middle East conflict is taking on the euro-area economy. Absent the government’s latest support package, annual price gains were on course to peak at about 4.5% this year. Prime Minister Sanchez’s hefty VAT cuts on energy mean that figure will now be about one percentage point lower. With energy prices showing no signs of easing, the risk is the Iran war might push the ECB to lift rates,” says Ana Andrade of Bloomberg Economics.
The government is acting already, rolling out a €5 billion package of tax cuts and subsidies that focus on transport, agriculture and electricity bills.
“This is an absolute disaster,” Prime Minister Pedro Sanchez told lawmakers on Wednesday. “Every bomb that falls in the Middle East ends up hitting — and we are already seeing it — our families’ pockets.”
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