Spain inflation holds at 3.2% as VAT cut ends

Spain’s consumer price index stood at 3.2% year on year in June, the National Statistics Institute confirmed on Wednesday, remaining well above the European Central Bank’s 2% target. The headline rate was propped up by a 6% annual increase in electricity costs, which offset cheaper motor fuels.

Beneath the surface, core inflation dropped to 2.9%, down a tenth of a percentage point from May. This measure strips out volatile energy and unprocessed food, suggesting broader price pressures are continuing to ease across the Spanish economy.

The rebound in electricity prices followed the government's decision to scrap a reduced VAT rate that had previously driven annual price falls of 5.5% in April and 4.3% in May. Higher household demand for air conditioning during the second warmest June on record compounded the effect of the tax change.

Fuel prices provided a partial counterbalance, with petrol rising just 1.3% and diesel by 14.1% following a brief US-Iran ceasefire. That truce has since collapsed, and with traffic through the Strait of Hormuz yet to normalise, renewed geopolitical tension threatens to push oil prices higher just as Madrid withdraws its own fuel subsidies.

The tourism sector also drove inflation higher, with accommodation prices surging 9.3% year on year. Housing costs accelerated sharply to 4.7%, up from 1.4% in May, while transport inflation slowed to 5.1%.

The government highlighted the stability of the overall figure and the slowing of food price growth to 1.9%. Finance Minister Arcadi España said: "June's CPI data confirm the effectiveness of the measures taken by the Spanish government. In an international context marked by uncertainty, inflation remains stable and food prices have slowed their growth to 1.9%. These figures reflect the impact of support policies for families and businesses, together with the push for renewable energy, which is strengthening the resilience of our economy".

Economy Minister Carlos Cuerpo argued the figures "confirm that the government's response plan is still meeting its goal: cushioning the impact of the war in Iran on inflation and protecting households' purchasing power". Officials also stressed that the commitment to renewable energy is "precisely what makes it possible to start phasing out emergency measures from a position of strength".

Regional disparities persisted, with Madrid recording the highest provincial inflation at 3.8% and Cáceres and Jaén the lowest at 2.2%. As emergency measures are gradually lifted, the persistence of a 3.2% headline rate highlights the ongoing challenge for the ECB as it weighs future interest rate decisions.