Why Spanish Inflation Stayed at 3.6% Despite Falling Energy Prices

Spain's inflation held at 3.6% in June, which caught people off guard. The median forecast was 3.4%, and energy prices have been dropping since the US-Iran peace deal reopened the Strait of Hormuz and brought oil back to pre-war levels. So you'd think inflation would've cooled off, but it didn't.

Electricity and natural gas drove the stickiness, even though gasoline prices softened. Core inflation (the measure that strips out volatile stuff like energy and food) did ease to 2.9%, but the headline number staying flat at 3.6% means the European Central Bank still has work to do. This was the first major inflation print from the eurozone since the ECB raised rates for the first time in three years earlier in June, and Spain reporting first means everyone's paying attention.

The ECB's target is 2%. Spain sitting at 3.6% is a problem. The backdrop changed pretty fast after the June rate decision, with oil retreating and geopolitical tensions easing, but officials are making it clear that more rate hikes are probably coming. Isabel Schnabel, who sits on the ECB's Executive Board, said last week that "we will need to continue raising interest rates" based on where things stand now.

Markets are still pricing in another quarter-point increase this year, though bets have been getting trimmed lately. Economists are dialing back expectations too. The thing is, even with energy prices dropping, Spain's central bank raised its 2026 inflation forecast to 3.6%, up 0.6 percentage points from its March projection. That's not a small adjustment.

Governor Jose Luis Escriva pointed out that aside from direct energy price increases, "indirect effects are becoming apparent." That's central bank speak for inflation seeping into other parts of the economy—wages, services, rents, food. Once that happens, it gets harder to bring down.

Spain went first, but the other big eurozone economies report Tuesday, and the bloc's overall number comes Wednesday. The forecast is for a slight deceleration to 3% from 3.2%, but if Spain's any guide, that might be optimistic. Energy was supposed to be the easy win after the peace deal, and if Spain couldn't capitalize on lower oil prices to bring inflation down faster, the rest of the eurozone might struggle too.

For traders watching EUR pairs, the context matters. If the full eurozone print comes in hotter than expected Wednesday, that reinforces the hawkish ECB narrative and could put a bid under the euro. If it comes in cooler, the market might start thinking the ECB can ease up sooner than officials are signaling.

The disconnect between falling energy prices and sticky inflation is the kind of thing that creates uncertainty, and uncertainty shows up as volatility. If you're trading EUR/USD or any eurozone equity indices, the Wednesday number is the one to watch, but Spain just gave you a preview that the setup might not resolve as cleanly as the headlines suggested a few weeks ago.

The risk here is that even with energy cooperating, inflation stays elevated because it's already embedded in other costs. Wages are a big one. If workers negotiated raises when inflation was running hot, those costs don't just disappear when oil drops. Same with services. Restaurants, hotels, haircuts—none of that reprices down just because gas got cheaper.

Spain's economy is still expected to grow 2.3% this year and outperform its peers, which is solid, but strong growth makes it harder to cool inflation. When GDP is expanding and unemployment is low, wage pressures don't ease up. The central bank's 2027 GDP forecast is 1.7%, which is a slowdown but still positive, and that suggests they're not expecting a hard landing. But it also means inflation could linger longer than people want.

The other angle is what this does to rate expectations. If inflation stays sticky across the eurozone, the ECB keeps tightening, and that eventually weighs on growth. The question becomes: do they prioritize getting inflation back to 2%, or do they pause earlier to avoid tipping the economy into a recession? Right now, the rhetoric says they're prioritizing inflation, but that could shift if growth starts cracking.

Wednesday's eurozone CPI print is the big one. If it comes in at or above 3.2% (matching last month), that's hawkish for the euro and probably pushes equities lower. If it drops to 3% or below, that gives the ECB room to be less aggressive, which could be a short-term relief rally for risk assets.

The other thing to track is how core inflation behaves. Spain's core came down to 2.9%, which is closer to target, but headline is what central banks talk about publicly. If core keeps easing but headline stays elevated because of energy or food volatility, that creates a weird dynamic where the underlying trend looks okay but the optics look bad.

For forex traders, EUR strength or weakness this week depends almost entirely on that Wednesday number and how it compares to expectations. For equity traders, eurozone indices like the DAX or IBEX are sensitive to rate expectations, so a hotter print means more pressure on those markets. Commodities are less directly impacted unless inflation staying high keeps the dollar strong, which would weigh on things like gold and oil priced in USD.

The setup right now is: energy cooperated, but inflation didn't follow it down as fast as expected. That's a structural stickiness problem, and it means the path forward is messier than the headlines from the peace deal suggested a month ago.