Spain’s March Inflation Rate Soars Above Expectations: Driving Factors and Future Outlook

Inflation in Spain Reaches 3.2% in March Following Three-Year Return to 21% VAT

In March, Spain’s inflation rate rose by four tenths to reach 3.2% year-on-year, exceeding market expectations. This increase was driven by the end of tax cuts on electricity and the return to a 21% VAT rate. Prices of goods and services in Spain were almost half a point more expensive in March compared to the previous month.

The monthly price evolution shows a continuous rise since the beginning of the year, with prices increasing by 0.8% in March compared to February, the largest increase since February 2023. The underlying inflation also rose by 0.5% in monthly terms. Funcas projected a lower rate for March, but provisional data released by the National Institute of Statistics suggest that the underlying inflation rate will be moderated to 3.3%, which is the lowest rate in two years.

The restoration of the normal VAT rate on electricity and gasoline are among the reasons for the increase in inflation. Services, more than goods, are driving prices up, and food products like olive oil are also experiencing significant price increases. Spain is now the third country in Europe where basic food products are becoming more expensive.

According to the Ministry of Economy, this slight increase in inflation was due to normalizing tax rates for electricity and rising gasoline prices. However, despite continued rises in food prices, they did so less than expected last year. Funcas warned about inflationary pressures in services and their potential impact on salaries and margins. Overall trends suggest an acceleration of inflationary pressures in Spain’s market.

The Ministry of Economy attributed this slight increase in inflation to normalizing tax rates for electricity and rising gasoline prices, despite continued rises in food prices being less than expected last year.

Furthermore, services have been driving price increases significantly while food products like olive oil have experienced price hikes as well.

Spain is now among Europe’s top three countries where basic food products are becoming increasingly expensive.

Provisional data suggests that Spain’s underlying inflation rate will be moderated at around 3.3% after reaching its highest level since February 2023 with an increase of 0.8%.

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