Spanish inflation falls more than expected to 2.4%

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Spanish inflation fell more than expected in August to hit its lowest rate for a year, according to official statistics that offer encouraging news to European Central Bank policymakers weighing the case for a rate cut next month.

Spain’s harmonised annual inflation rate — a standardised measure for the EU and Eurozone — fell to 2.4 per cent in August from 2.9 per cent in July, marking the lowest reading since August 2023, the Institute for National Statistics said on Thursday. Economists polled by Reuters had forecast a fall to 2.5 per cent.

The data also showed core inflation, which strips out energy and food, declined from 2.8 per cent to 2.7 per cent in August, the lowest since January 2022. Inflation in Spain, the Eurozone’s fourth-biggest economy, peaked at a multi-decade high of 10.7 per cent in July 2022 following the surge in energy and food prices after Russia’s invasion of Ukraine.

The data was published a day before August’s flash figures for the eurozone. Markets expect inflation in the currency bloc to decline to 2.2 per cent from 2.6 per cent, a fall that would offer policymakers more evidence that inflation is on track to reach the ECB’s 2 per cent target by year-end.

Markets are expecting the ECB to cut the deposit rate by a quarter of a percentage point to 3.5 per cent at its next meeting on September 12.

George Moran, economist at the Bank Nomura, said the recent decline in Eurozone wage growth, which was lower than expected in the second quarter, “essentially makes a September rate cut a lock”.

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

Inflation data for some German states also showed sharp declines in August. The countrywide inflation figure, which is published later on Thursday, is expected to show a slowdown in the annual rate to 2.1 per cent in August from 2.3 per cent in the previous month.

“Together the Spanish and German inflation figures suggest that eurozone inflation in August came in even lower than our below-consensus forecast of 2.2 per cent, and therefore was closer to the ECB’s 2 per cent inflation target than expected,” said Melanie Debono, economist at Pantheon Macroeconomics.

Moran said the August inflation data “is likely to raise expectations for an October rate cut”.

He added that a lower inflation reading for the Eurozone will underscore Philip Lane’s remarks last week about the risks of elevated interest rates on the inflation outlook.

The ECB’s chief economist warned at the meeting of central bankers in Jackson Hole that “a rate path that is too high for too long would deliver chronically below-target inflation over the medium term”.