Spanish Inflation Soars to 10% as ECB Gears Up for Hikes

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Spanish inflation unexpectedly surged to a record, defying government efforts to rein it in and signaling intensifying price pressure as the European Central Bank gears up to raise interest rates for the first time in more than a decade.

The surprise 10% reading for June dashes hopes that inflation in the euro zone’s fourth-biggest economy had peaked and highlights how a squeeze on consumers, once forecast to be transitory, is instead intensifying. The rate is up from 8.5% in May and exceeded all 15 estimates in a Bloomberg survey of economists.

The reading will embolden ECB policy makers pushing for big increases in interest rates when they kick off next month. While President Christine Lagarde this week reiterated plans for a quarter-point rate hike in July to begin a sustained cycle of increases, other officials have floated the idea of more aggressive action.

Governing Council member Gediminas Simkus said in a Bloomberg interview published earlier Wednesday that a 50 basis-point hike should be an option at next month’s meeting. The inflation rate in his country, Lithuania, is above 20%. His colleague Martins Kazaks said rates can be raised “quite quickly,” and that front-loading of hikes is “reasonable.” Still, Pierre Wunsch of Belgium said a 25 basis-point hiked in July is a “done deal.”

Money markets pared tightening bets on Wednesday, pricing 163 basis points of hikes this year compared to 164 basis points on Tuesday. This would be consistent with two half-point and two quarter-point increases across the next four policy meetings.

Spain’s gauge of underlying prices that strips out volatile items also quickened in June, reaching 5.5% — the most since 1993.

Inflation expectations among Spanish consumers increased this month, according to a separate release from the European Commission, which showed an overall decline for the euro area. Spain wasn’t alone in bucking the trend — households on the region’s periphery including Greece, Portugal and Estonia also grew more worried.

The Spanish data could offer a prelude to figures from the continent’s biggest economies, with Germany set to report later Wednesday and France on Thursday. Inflation in the German states of North Rhine Westphalia, Hesse, Bavaria, Brandenburg, Baden Wuerttemberg and Saxony slowed in June, separate data showed. The euro zone itself will release numbers on Friday.

Amid the price spike, Spanish businesses and households are hurting, while the government has squabbled with INE, whose head will step down after months of criticism his office has consistently overestimated price gains.

What Bloomberg Economics Says…

“The reading contradicts earlier expectations that inflation in Spain had peaked at 9.8% in March and was subsequently trending down. It also highlights the limited role policy support is having in bringing prices down. While a series of measures announced by the government are certainly keeping a lid on price growth, they have not proved effective in fully offsetting rising energy pressures.”

–Ana Luis Andrade, European economist. For full react, click here

Prime Minister Pedro Sanchez has joined efforts to tame inflation, capping the price of natural gas used to generate electricity, though that measure has proved less of a benefit than envisaged.

To help consumes, the government announced a 0.20 euro subsidy for gasoline in March, with the administration paying 0.15 euros and oil firms the rest. As part of a new 9 billion-euro ($9.5 billion) package announced last week, Sanchez will extend the subsidy, which was due to end June 30, through the end of the year.

The government says the aid, which also included one-off checks for poor households and lower taxes on power bills, will shave 3.5 percentage points off inflation in 2022.

(Updates with Wunsch in fourth paragraph)

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