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Spanish inflation slows more than expected to 5.8%

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Spanish inflation slowed more than expected in December, raising expectations of an easing of price pressures in the euro zone.

Consumer prices in Spain rose 5.8% in the year to this month, according to preliminary data published by the national statistics office on Friday. The number was down from 6.8% the previous month and a steeper drop than economists had anticipated.

The data from Spain is the first December inflation figures for a euro zone member state. If similar declines occur elsewhere, European Central Bank policymakers may opt to reduce the pace of rate hikes faster than markets expect.

Data from Germany will be released on Tuesday and should show a slowdown in inflation from 10% to 9%. Pressures on Italian prices are also likely to have eased, while figures for the Eurozone as a whole are expected to show inflation returning to single digits. Economists are forecasting a drop to 9.7 percent in December from 10.1 percent the previous month, when data for the single-currency area is released next Friday.

Although global inflation is now falling in several major economies, underlying price pressures continue to persist. Core inflation in Spain – a measure that excludes energy and food inflation – accelerated to 6.9 percent in December from 6.3 percent the previous month and the highest since records began in 2003.

“Services prices will continue to show robust monthly momentum, keeping eurozone core inflation close to 2022 highs,” said Iaroslav Shelepko, economist at Barclays, adding that he expects “increasing divergence” between the headline and core measures as a “theme” for 2023.

Faced with the highest inflation ever recorded, the ECB raised rates by 2.5 percentage points throughout 2022, from minus 0.5 to 2%. Inflation peaked at 10.6% in October.

The next ECB council will meet to set monetary policy on February 2. ECB President Christine Lagarde hinted after the rate-setters vote in December that a half-point rise in borrowing costs was likely. However, steeper-than-expected declines in inflation would increase the chances of the ECB moving to quarter-point increases early next year.

Spain’s reading was below the 6 percent forecast by economists polled by Reuters and marked the fifth consecutive decline from a peak of 10.8 percent recorded in July.

Nadia Calviño, Spain’s deputy prime minister and economy minister, hailed the data as “very positive”, noting that Spain’s inflation rate has fallen by 5 percentage points in five months. “There may be increases, but the tendency is for inflation to continue falling in 2023,” she told Cadena Ser radio.

Line graph of % annual change in consumer price index showing Spain's inflation slowing more than expected

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 the price of gas, limiting wholesale gas costs paid by power generators.

Madrid has also introduced a general fuel subsidy that lowers petrol and diesel prices by €0.20 a litre, although it is set to expire on December 31 and will only be available to business consumers from next year.

Calviño said: “All the measures we have implemented are aimed at containing price increases and we see that they are proving to be effective. The power outage is the fundamental factor that explains why inflation is falling.”

The country has also benefited from its historically low reliance on Russian gas compared to Germany and other parts of northern Europe.

In a new €10 billion package of measures to lower the cost of living, Spain’s Socialist Prime Minister Pedro Sánchez this week announced a sales tax cut from 4% to zero for basic foodstuffs including bread, milk , cheese, fruits and vegetables.

Calviño described the measures as a “very powerful” signal that the government would keep the cost of basic foodstuffs under control.

The package included a one-off payment of €200 to around 4 million households and was the third round of support announced this year, bringing the combined cost to the government to €45 billion.