Spain Inflation Quickens in First Peek of Key Data for ECB

Spanish inflation quickened again in the first of a string of reports from around the region that will help European Central Bank officials judge whether to keep raising interest rates.

(Bloomberg) — Spanish inflation quickened again in the first of a string of reports from around the region that will help European Central Bank officials judge whether to keep raising interest rates.

Consumer prices rose 2.4% in August from a year earlier, up from 2.1% the prior month, driven by fuel costs, the country’s statistics agency said on Wednesday. 

The outcome matched the median estimate in a Bloomberg survey of economists. It’s the second consecutive month of acceleration.

The euro extended losses and bonds slipped as investors digested data, which did little to tip the balance for traders. Market pricing implies roughly even odds of a quarter-point increase to 4% next month.

The common currency has come under pressure as the end of the ECB’s tightening campaign comes into view. It was trading 0.2% weaker at $1.0859, down from an 18 month-high of $1.1276 in mid July. Bonds meanwhile have rallied, with 10-year German yields dropping almost 20 basis points from a five-month high earlier this month.

The numbers from the region’s fourth-biggest economy kick off more than 24 hours of national reports that will ultimately lead to the release of euro-zone inflation on Thursday, which is seen likely to show underlying price pressures still stubbornly stuck above 5%. 

Hike or Hold

That’s more than twice the goal targeted by ECB officials, who have identified this week’s data as pivotal for a cliffhanger decision on Sept. 14. 

Policymakers will determine then if a 10th consecutive hike in borrowing costs is needed to tame inflation, or whether the euro-zone is weak enough to warrant a pause.

Consumer’s inflation expectations across the regions also are sending a warning signal: A European Commission gauge indicated rising concern in the euro zone and its top four economies. That coincided with a downturn in overall economic sentiment.

More significant in ECB officials’ judgment than Spain will be figures later on Wednesday from Germany, the region’s biggest economy, that are likely to show consumer prices are still growing at an annual pace exceeding 6%. 

Initial data released earlier on Wednesday from North Rhine-Westphalia, the most populous German state, showed inflation at 5.9%, up from 5.8% in July. National readings for Brandenburg, Baden Wuerttemberg and Saxony also saw accelerations, while Hesse and Bavaria both slowed.

French numbers on Thursday are anticipated by economists to show quickening further above 5%, while Italy’s outcome is seen slowing though still stuck above that level. 

The report for overall consumer-price growth in the euro region will also be published on Thursday. So-called core inflation that strips out volatile food and energy prices, a measure ECB officials are studying closely, is expected to come in at 5.3%, according to forecasters’ median estimate. 

Policymakers have framed the data as crucial. Austria’s Robert Holzmann, an ECB hawk, told Bloomberg earlier this week that he favors another rate hike “if there aren’t any big surprises.”

His Finnish colleague Tuomas Valimaki said on Tuesday that the Governing Council is “totally open” on what to do and that any move is “dependent on incoming data.” 

Spain has recently enjoyed some of the region’s lowest price growth, even including a dip below 2% in June. That’s expected to reverse later this year as base effects change. 

Underlying inflation has remained stubbornly high, in common with the overall euro area. That measure, based on Spanish methodology, was at 6.1% in August.

What Bloomberg Economics Says…

“Spain’s headline inflation – which has been lower than that of the euro-area as a whole – will tick up further. We see it ending 2023 at around 4%.”

—Ana Andrade, economist

The country faces additional uncertainty amid a political stalemate after an inconclusive election in July that left both main candidates — opposition leader Alberto Nunez Feijoo and Prime Minister Pedro Sanchez — short of a majority in parliament. 

Sanchez campaigned on a platform that emphasized Spain’s economic performance and the fight against inflation. 

Feijoo, who won the most votes, has been invited by King Felipe VI to try to form a government even though he doesn’t have enough support from lawmakers. The investiture debate is scheduled for Sept. 26 and 27.

–With assistance from Joshua Robinson, Joel Rinneby, Constantine Courcoulas and Kristian Siedenburg.

(Updates with inflation expectations in ninth paragraph)

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