Spain's Inflation Rises to Over Twice the ECB Target
Spain's preliminary inflation rate for August rose to about 4.3%, the highest in over three years, exceeding the European Central Bank's (ECB) 2% target by more than double. The driving factors are fuel and shopping basket prices, with energy shocks and partial closures of the Strait of Hormuz pushing up diesel and gasoline prices; core inflation fell to about 2.9%.
The final value for July has been revised up to 3.6%, with harmonized inflation at 3.9%, the highest since February 2023. Since June, the country has had the highest inflation among the four largest economies in the Eurozone. ECB staff have revised Spain's inflation forecast for 2026 up to 3.6%.
In France, July's consumer prices rose 2.1% year-on-year, with harmonized inflation at 2.4%, both higher than in June; energy prices rose 12.6% year-on-year, with oil products up about 20.7% and natural gas 17.7%, while services increased by 2.2%. The preliminary harmonized inflation for August is set to be released on the same day, with market predictions around 2.2%. Eurozone inflation for July was 2.9%, up from 2.8% in June and 2.0% a year ago.
The ECB raised the deposit facility rate by 25 basis points to 2.25% in June, marking the first rate hike in nearly three years; it remained unchanged on July 23, with refinancing at 2.40% and marginal lending at 2.65%. According to Reuters, citing three officials, board members are prepared to raise rates by another 25 basis points to 2.50% at the meeting on September 9-10, to prevent energy prices from rising due to the Iran conflict, but they do not intend to signal further tightening at the meeting.
Paul Hollingsworth, head of developed markets economics at BNP Paribas, believes that a rate hike is almost a foregone conclusion, although the ECB has not made a formal decision. The bank's July research also indicated that a rate hike in September is very likely. The June forecast had already incorporated a rate hike into its assumptions. The market is pricing in one to two subsequent rate hikes. Long-term inflation expectations remain anchored around 2%, with limited second-round effects on wages so far.
Buyers are the money markets buying insurance against energy shocks, while sellers are duration bonds. Funds are flowing from government bonds and interest-sensitive stocks to short-term cash. Beneficiaries are banks with rising net interest margins; those under pressure include highly indebted sovereigns, real estate, and the German 10-year bonds, which are already at a 15-year high. This is a policy repricing driven by energy supply shocks, not a rate hike due to overheating demand.
Source: Public Information
ABAB AI Insight
The current ECB round is not a repeat of the wage-service spiral seen in 2022. The initial rate hike in June was to prevent the Iran conflict and Hormuz situation from causing a second round of inflation driven by oil prices; the pause in July was to assess August prices and September employee forecasts. Spain's harmonized inflation reaching nearly 4% first is due to the weight of imported energy and the rise in diesel prices pulling the overall index away from the core. France's energy prices are already in double digits year-on-year, but the core remains at 1.3%, indicating that the shock is still confined to fuel prices and has not yet fully entered wage contracts.
Capital is moving from long bonds to cash, effectively pricing in "another rate hike" ahead of time. The German 10-year bond has returned to levels seen in 2011, with Italy and France's fiscal premiums rising simultaneously. The motivation is not to shrink the total credit volume but to prevent a repeat of the 2022 narrative: energy prices rise first, expectations loosen later, and service prices follow. Those issuing bonds for refinancing and those holding long durations will be the first to pay and then reprice.
This is similar to the emergency rate hikes after Russia cut off gas in 2022 and the core economies moving rates first during the 1970s oil shocks before looking at wages. The Eurozone is in a control phase: growth has slowed, and fiscal policy is expanding for national defense, while monetary policy can only manage expectations and not oil wells. Spain's growth is still faster than that of France and Germany, but it has already submitted to higher inflation, making rate hikes feel more like an import tax for it.
Essentially, it is a transfer of pricing power. Oil prices have taken a portion of the inflation center away from the ECB's target, and interest rate tools can only reprice expectations. When officials say a rate hike is almost certain but refuse to signal the next jump, the market receives the message of "one insurance, not a cycle reversal." Until energy supply stabilizes, the curve will not treat 2.25% as the endpoint.
ABAB News · Cognitive Laws
Energy price increases first change inflation, then change interest rates
When the core remains unchanged, rate hikes buy expectations
Doubling the target often comes from the import bill