Inflation in Spain drops to 2.2%, but challenges in services and wages persist.

The recent Consumer Price Index (CPI) report reveals an encouraging outlook for the Spanish economy, with a year-on-year inflation rate of 2.2%. This figure, which exceeds the eurozone average by two-tenths, suggests that the country may be leaving behind the inflationary episode that began due to the energy crisis and complications in the supply chain. However, while the number is positive, one should not fall into excessive optimism, as the core CPI, which excludes volatile items like food and energy, remains at 2.7%. As the cost of the shopping basket deflates, the decline in production costs is reflected in retail prices. The downward trend in prices for both processed and fresh foods, which has been ongoing for several months, suggests that this category may be on track to stabilize around 2%. Meanwhile, electricity continues to show volatility that complicates any clear forecasting. In the case of fuels, prices remain at manageable levels, despite announcements of supply cuts from producing countries. One of the most significant elements in the current context is businesses' perception of the future. Expectations of lower prices in the coming months, captured in a recent European economic survey, are a positive indication that fears of uncontrolled inflation have not materialized. This variable is crucial in inflation analysis, as unanchored expectations could result in a persistent inflationary cycle. On the other hand, although wages have increased in the first quarter of the year, recent increments have been more moderate, which could indicate a natural adjustment in the labor market. However, not all news is good. Inflation in the services sector remains resilient, registering figures around 3.5% in Spain and exceeding 4% in the eurozone. This phenomenon is not the result of an increase in production costs but is due to robust demand in sectors that are often less competitive than manufacturing. Since 2019, the CPI for services has accumulated an increase of nearly 18%, contrasting with the more moderate growth in the prices of non-energy industrial goods. In this context, the European Central Bank (ECB) is expected to acknowledge progress in disinflation and, at its next meeting, opt for a new cut in interest rates. This move may also be driven by the weakness shown by the European economy, particularly regarding investment. The lack of credit activity and the cautious sentiment of consumers as summer comes to an end are factors that the ECB will consider. Nonetheless, the monetary institution will proceed with caution, as disinflation has not yet stabilized in the services sector. Additionally, the ECB will be attentive to the effects of its decisions in a globally interconnected financial context, where the movements of the U.S. Federal Reserve also carry significant weight. A potential rate cut on the other side of the Atlantic could facilitate decision-making in Europe. The scenario being outlined is clearly different from previous years. Labor market tensions, exacerbated by demographic changes and trade barriers, complicate the horizon of monetary policy. The labor shortage in certain sectors suggests that interest rates may not return to pre-crisis levels, marking the beginning of a new monetary cycle. The era of globalization as we knew it has changed, and with it, economic tools must adapt to this new reality. Central banks are likely to have to deal with more persistent inflation in some sectors, which will require a rethink of monetary and fiscal policy strategies. In summary, while the recent CPI suggests that the end of the inflationary episode may be near, challenges in the services sector and market expectations indicate that the path to complete stability is still fraught with uncertainties.