Spain | Inflation does not merit these rates

Inflation was bound to fall. As we look ahead, one of the main risks to economic activity in Spain may be that monetary policy will be too restrictive as inflation relents.

Key points

• Key points:
• Inflation will be below 2% in June and is likely to remain there over the summer as much of the increase in fuel and food prices has now been reversed.
• Given what we know about the processes that steer inflation, it is likely that, just as the recent spike caught us by surprise, the same may be true as it falls over the next two years.
• The fuse of inflation was lit by three events that happened to coincide: rising fuel and food prices, the redirection of household spending towards services, and supply constraints in the production of goods due to the lockdown and mobility restrictions in certain countries.
• The reversal of these factors, together with the wage agreement, will keep a lid on inflation over the coming months.
• However, in order to achieve the same price impact in the euro area as a whole moving forwards, the ECB may decide that further interest rate hikes are in order the short term and that rates should remain relatively high in the mid run.

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