In March, inflation increased by four tenths to reach 3.2% year-on-year, driven by the end of tax cuts on electricity and the return to a 21% VAT rate. This was higher than expected by the 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.
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. According to provisional data released by the National Institute of Statistics, 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 the rise in gasoline prices are among the reasons for the increase in inflation. Services are driving prices up more than goods, and food products like olive oil are experiencing significant price increases. Spain is now ranked third among EU countries where basic food products are becoming more expensive.
The Ministry of Economy attributed the slight increase in inflation to normalizing tax rates for electricity and rising gasoline prices but despite continued increases in food prices, they did so less than expected last year. Funcas warned about inflationary pressures from services that may impact salaries and margins. Overall trends indicate a strengthening of inflationary pressures in markets across Europe.
In summary, inflation increased significantly in March due to several factors including tax cuts ending and VAT rates returning to their original levels, as well as rising gasoline prices and decreasing food product affordability compared to previous months.
However, despite this trend towards higher inflationary pressures, there are some hopeful signs that it will moderate soon as projected by Funcas through their analysis of provisional data released by INESTAT indicating an estimated underlying inflation rate of 3.3% for March which is lower than predicted earlier.
