Spanish inflation soars to 10% as ECB gears up for rate hikes

SPANISH inflation unexpectedly surged to a record, defying government efforts to rein it in and signaling intensifying price pressure as the European Central Bank (ECB) gears up to raise interest rates for the first time in more than a decade.

The surprise 10% reading for June dashes hopes that inflation in the euro zone’s fourth-biggest economy had peaked and highlights how a squeeze on consumers, once forecast to be transitory, is instead intensifying. The rate is up from 8.5% in May and exceeded all 15 estimates in a Bloomberg survey of economists.

The reading will embolden ECB policymakers pushing for big increases in interest rates when they kick off next month. While President Christine Lagarde this week reiterated plans for a quarter-point rate hike in July to begin a sustained cycle of increases, other officials have floated the idea of more aggressive action.

Governing Council member Gediminas Simkus said in a Bloomberg interview published earlier Wednesday that a 50 basis-point hike should be an option at next month’s meeting. The inflation rate in his country, Lithuania, is above 20%. His colleague Martins Kazaks said rates can be raised “quite quickly,” and that front-loading of hikes is “reasonable.”

The yield on German two-year debt, which is most sensitive to changes in borrowing costs, was down eight basis points to 0.88% after earlier sliding as much as 11 basis points.

Spain’s gauge of underlying prices that strips out volatile items also quickened in June, reaching 5.5% – the most since 1993.

The Spanish data could offer a prelude to figures from the continent’s biggest economies, with Germany set to report later Wednesday and France on Thursday. Inflation in the German state of North Rhine Westphalia slowed to 7.5% in June, separate data showed. The eurozone itself will release numbers on Friday.

Amid the price spike, Spanish businesses and households are hurting, while the government has squabbled with INE, whose head will step down after months of criticism his office has consistently overestimated price gains.

Prime Minister Pedro Sanchez has joined efforts to tame inflation, capping the price of natural gas used to generate electricity, though that measure has proved less of a benefit than envisaged.

To help consumes, the government announced a 0.20 euro subsidy for gasoline in March, with the administration paying €0.15 and oil firms the rest. As part of a new €9 billion (RM42.3 billion) package announced last week, Sanchez will extend the subsidy, which was due to end June 30, through the end of the year.

The government says the aid, which also included one-off checks for poor households and lower taxes on power bills, will shave 3.5 percentage points off inflation in 2022. – Bloomberg