Inflation in Spain Accelerates, Surcharging Spanish Consumers and Businesses

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

In March, inflation in Spain accelerated by 0.4 percentage points to reach a year-on-year rate of 3.2%, driven by the end of tax cuts on electricity and the return to a 21% VAT rate. This increase was higher than expected by market consensus, with Funcas projecting a lower rate for March. Prices of goods and services in Spain were almost half a point more expensive in March compared to the previous month.

Spain has experienced continuous price increases 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. The provisional data released by the National Institute of Statistics suggest that the underlying inflation rate will be moderated to 3.3%, the lowest rate in the last two years.

The restoration of the normal VAT rate on electricity and the rise in 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 considered one of three countries where basic food products are becoming increasingly expensive, alongside France and Italy.

The Ministry of Economy attributed the slight increase in inflation to the normalization of tax rates on electricity and gasoline prices but did not rule out other factors such as supply chain disruptions or geopolitical tensions affecting global commodity markets that could further exacerbate inflationary pressures in Spain.

Despite continued rising food prices, they increased less than expected due to government interventions such as subsidies for farmers and restrictions on exports.

Funcas warned about inflationary pressures building up in services sector which may impact wages and margins negatively.

Overall trend indicates a strengthening of inflationary pressures in Spain’s economy which could impact consumers’ purchasing power and businesses’ profitability if left unchecked.

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