Record-Breaking Inflation in Spain: Driven by Tax Cuts and Global Commodity Shortages

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

In March, inflation in Spain accelerated 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 increase 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. 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 the third country in the EU where basic food products are becoming more expensive.

Despite efforts from both governments and central banks to curb inflationary pressures, prices continue to rise at an alarming rate across Europe and beyond. While some experts predict that these pressures will eventually subside as demand slows down or interest rates rise, others fear that they could persist for much longer due to ongoing supply chain disruptions caused by global economic uncertainty or geopolitical tensions.

The Ministry of Economy attributed some of this upward pressure on prices to recent changes in taxes and tariffs related to energy policy and consumer protection regulations. However, they did not rule out other factors such as global commodity shortages or rising labor costs as potential drivers of future price increases.

Overall, while there have been some encouraging signs that inflationary pressures may begin to ease soon, it remains unclear how long these trends will continue or what impact they will have on individual households’ financial wellbeing as well as broader economic stability across Europe and beyond.

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