Spanish inflation falls more than expected to 2.4%

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Inflation in Spain fell more than expected in August, hitting its lowest level in a year, official statistics showed. That is encouraging news for European Central Bank policymakers who are considering a rate cut next month.

Spain's harmonised annual inflation rate – a standardised figure for the EU and euro zone – fell to 2.4 percent in August from 2.9 percent in July, reaching its lowest level since August 2023, the Institute of National Statistics said on Thursday. Economists polled by Reuters had forecast a decline to 2.5 percent.

The data also showed that core inflation, which excludes energy and food, fell to 2.7 percent in August from 2.8 percent, the lowest since January 2022. In Spain, the eurozone's fourth-largest economy, inflation hit its highest level in several decades at 10.7 percent in July 2022, after energy and food prices rose sharply following Russia's invasion of Ukraine.

The data was released a day before preliminary figures for the euro zone for August. Markets expect inflation in the currency bloc to fall to 2.2 percent from 2.6 percent, a decline that would provide policymakers with further evidence that inflation is on track to reach the ECB's target of 2 percent 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, economist at Nomura Bank, said the recent decline in eurozone wage growth, which was weaker than expected in the second quarter, “makes a rate cut in September virtually certain”.

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

Inflation data from some federal states also showed a sharp decline in August. The nationwide inflation rate, which will be released later on Thursday, is expected to show a decline in the annual rate to 2.1 percent in August, from 2.3 percent in the previous month.

“Taken together, the Spanish and German inflation figures 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 inflation target of 2 percent than expected,” said Melanie Debono, economist at Pantheon Macroeconomics.

Moran said August inflation data would “likely raise expectations for a rate cut in October.”

He added that a lower inflation reading for the euro zone would underline Philip Lane's comments last week about the risks of elevated interest rates to the inflation outlook.

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