Spain's inflation holds at 3.2% in May as government energy tax breaks near expiration amid Iran war shock

Inflation stabilizes despite geopolitical shock

Spain's Consumer Price Index (CPI) held steady at 3.2% year-on-year in May, according to preliminary data released Friday by the National Statistics Institute (INE). This marks the third consecutive month above 3%, coinciding with the ongoing conflict in the Middle East and the closure of the Strait of Hormuz, which has triggered a global oil price crisis. The figure matches April's rate and remains two-tenths below the March peak when the conflict erupted.

This stability confirms that the Government's response plan is meeting its main objective: cushioning the impact of the external shock on inflation and household purchasing power.

Core inflation edges upward

Core inflation, which excludes volatile energy and unprocessed food prices, rose one-tenth to 2.9% in May. Economists view this as a potential early signal that fuel price increases are beginning to structurally feed into other goods and services. The Ministry of Economy highlighted that food and non-alcoholic beverage prices remained flat compared to last year's rise, helping anchor the headline figure alongside contained electricity and clothing costs.

Tax relief measures begin to unwind

A critical juncture arrives on June 1, when reductions to the Special Electricity Tax and VAT on electricity, natural gas, briquettes, pellets, and firewood will expire. These measures were part of the anti-crisis package under Royal Decree 7/2026, enacted on March 20. The phase-out was triggered because electricity price increases in April 2026 versus the previous year fell below the 15% threshold stipulated in the decree for extending the rebates.

Other fiscal supports—including fuel tax reductions, the 10% VAT on gasoline and diesel, and the partial refund for professional diesel—remain in force until June 30. Enhanced discounts on the social electricity bonus (42.5% for vulnerable consumers and 57.5% for severely vulnerable) also continue.

Government touts 'renewable shield'

The Ministry of Economy, led by Vice President Carlos Cuerpo, attributed the inflation stability to the government's measures and what it calls the "renewable shield." The ministry stated that Spain's strong commitment to renewable energy and energy sovereignty has kept electricity prices contained, with April even showing a year-on-year decline. Cuerpo held meetings this week with employers' associations and trade unions to assess the measures' effects.

The decisive commitment to renewable energies and energy sovereignty places Spain in a position of strength to face volatility in energy markets, keeping electricity prices contained.

Outlook darkens without extension

The government has begun consultations with social partners and affected sectors about potentially extending the anti-crisis shield beyond June. According to the Funcas panel consensus, inflation is forecast to average 3.1% in 2026, up from 2.7% in 2025. If the shield is not extended, Funcas estimates inflation will exceed 4% throughout the summer and push the annual average to around 3.6%. The package has cost approximately €5 billion through June alone.

What happens next

The trajectory of consumer prices in the coming months hinges on two factors: the evolution of the Middle East conflict and whether the government extends the anti-crisis decree. With the Strait of Hormuz remaining closed, the European Central Bank's 2% inflation target is described by some analysts as "science fiction." The INE noted that upward pressure in May came from transport and recreation, while clothing and food exerted downward influence.