Spain's EU-Harmonized Inflation Rises to 1.8% in October 2024: Key Drivers and Economic Implications

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Spain EU-Harmonized Inflation October 2024

In October 2024, Spain's 12-month EU-harmonized inflation rate rose to 1.8%, up from 1.7% in September. This increase was influenced by several key factors:

Reapplication of IVA Tax on Basic Foods: One significant factor contributing to the rise in inflation was the reapplication of the Value Added Tax (IVA) on basic foods. This tax adjustment likely led to higher costs for essential goods, thereby pushing up the overall inflation rate.
Energy Prices: Although energy prices showed a slight improvement, they remained a crucial component. In the euro area, energy prices increased from -6.1% in September to -4.6% in October, indicating a lessening of the deflationary pressure in this sector, which can indirectly impact the overall inflation rate in Spain.
Food Prices: The increase in food prices also played a role. Food, alcohol, and tobacco saw an annual rate increase from 2.4% in September to 2.9% in October. This rise in food inflation can be attributed to global supply chain issues, higher production costs, and possibly the reimposition of the IVA tax.

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Services: Services inflation remained high but stable at 3.9% in October, the same as in September. This stability in services inflation suggests that the cost of services continued to contribute significantly to the overall inflation rate without additional spikes.

Economic Impact

The rise in inflation has several implications for the Spanish economy:

Consumer Spending: Higher inflation rates can erode purchasing power, leading to reduced consumer spending. This is particularly concerning given that private consumption growth is expected to exceed 2023 levels, driven by positive underlying fundamentals.

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Savings Rate: Despite the rise in inflation, household savings remained high, standing at 13.4% of gross disposable income in Q2 2024. This high savings rate indicates that households have been cautious with their spending, possibly due to uncertainty about future economic conditions.
Housing Market: The housing market showed robust demand, with sales increasing significantly in July 2024. This demand, coupled with rising home prices, suggests that the housing sector remains a strong component of the economy, contributing to overall economic activity despite the inflationary pressures.
Economic Growth: Economic activity in Spain is expected to grow at 2.1% in 2024, driven by domestic demand and sustained labor market resilience. This growth projection indicates that despite the inflationary pressures, the economy is expected to remain resilient and continue to expand.

In summary, the rise in Spain's EU-harmonized inflation rate to 1.8% in October 2024 was influenced by the reapplication of the IVA tax on basic foods, stable services inflation, and slight improvements in energy prices. While this rise poses challenges to consumer purchasing power, the overall economic outlook remains positive, supported by strong domestic demand and a resilient labor market.

Spain's EU-Harmonized Inflation Rises to 1.8% in October 2024: Key Drivers and Economic Implications

Preview

Spain EU-Harmonized Inflation October 2024

In October 2024, Spain's 12-month EU-harmonized inflation rate rose to 1.8%, up from 1.7% in September. This increase was influenced by several key factors:

Reapplication of IVA Tax on Basic Foods: One significant factor contributing to the rise in inflation was the reapplication of the Value Added Tax (IVA) on basic foods. This tax adjustment likely led to higher costs for essential goods, thereby pushing up the overall inflation rate.
Energy Prices: Although energy prices showed a slight improvement, they remained a crucial component. In the euro area, energy prices increased from -6.1% in September to -4.6% in October, indicating a lessening of the deflationary pressure in this sector, which can indirectly impact the overall inflation rate in Spain.
Food Prices: The increase in food prices also played a role. Food, alcohol, and tobacco saw an annual rate increase from 2.4% in September to 2.9% in October. This rise in food inflation can be attributed to global supply chain issues, higher production costs, and possibly the reimposition of the IVA tax.

Preview

Services: Services inflation remained high but stable at 3.9% in October, the same as in September. This stability in services inflation suggests that the cost of services continued to contribute significantly to the overall inflation rate without additional spikes.

Economic Impact

The rise in inflation has several implications for the Spanish economy:

Consumer Spending: Higher inflation rates can erode purchasing power, leading to reduced consumer spending. This is particularly concerning given that private consumption growth is expected to exceed 2023 levels, driven by positive underlying fundamentals.

Preview

Savings Rate: Despite the rise in inflation, household savings remained high, standing at 13.4% of gross disposable income in Q2 2024. This high savings rate indicates that households have been cautious with their spending, possibly due to uncertainty about future economic conditions.
Housing Market: The housing market showed robust demand, with sales increasing significantly in July 2024. This demand, coupled with rising home prices, suggests that the housing sector remains a strong component of the economy, contributing to overall economic activity despite the inflationary pressures.
Economic Growth: Economic activity in Spain is expected to grow at 2.1% in 2024, driven by domestic demand and sustained labor market resilience. This growth projection indicates that despite the inflationary pressures, the economy is expected to remain resilient and continue to expand.