Spain's inflation hits 3.8% as Iran war shock ripples through economy, BBVA Research warns

Spanish households are facing a sharp acceleration in living costs as the economic shockwaves from the war in Iran drive energy and food prices higher, according to the latest 'Situación España' report from BBVA Research. The bank's analysts project average inflation of 3.8% for 2026, a full percentage point above their forecast from just three months ago and the highest reading in 18 years if the exceptional 8.4% spike of 2022 is excluded.

Growth holds but headwinds build

Spain's GDP is still expected to expand by 2.4% this year, a figure that keeps the economy among the more resilient in Europe. However, the growth engine is losing steam. BBVA Research cut its 2027 forecast by three-tenths to 2.1%, citing the persistent drag from expensive energy, bottlenecks in global trade, and weakening demand from key European trading partners. The bank calculates the supply shock from the Middle East conflict will shave 0.5 percentage points off GDP in 2026 and 0.1 points in 2027, while adding 1.3 and 0.6 points to inflation respectively.

The cost to the global economy does not come only from oil, but from a combination of more expensive raw materials, the reappearance of logistical bottlenecks and the deterioration of confidence.

Energy and food bite hardest

The inflation surge is concentrated in energy products and fresh food, where price increases are expected to exceed 7%. The conflict has pushed oil prices toward $90 a barrel, up from earlier assumptions of just above $70, and has also raised fertiliser costs. This hits manufacturers and the agri-food sector directly, eroding the competitiveness of Spanish producers. For the most vulnerable households, the impact is disproportionate: the poorest 10% have a negative savings rate, spending twice their income and relying on debt, while the next 10% save nothing at all.

Housing prices outstrip wages

Alongside inflation, the housing market continues to exert pressure. BBVA Research sees home prices rising 12% in 2026 and a further 5.7% in 2027, a pace that triples wage growth. Residential construction investment is forecast to grow 5.7% this year and 6.7% next, supported by the creation of around 200,000 new households annually. Yet the government's €7 billion housing plan is expected to add only 33,000 units, a figure the bank calls insufficient without ambitious reforms.

Fiscal and monetary squeeze

The government's fiscal support measures, valued at €5 billion, have cushioned the blow but will push the public deficit to 2.8% of GDP in 2026, well above the 2.1% committed to Brussels. As those measures are withdrawn, the deficit is projected to ease to 2.5% in 2027, still far from the 1.8% target. On the monetary side, BBVA Research expects the ECB to raise its deposit rate by 25 basis points in June, with another hike in the first half of 2027, taking the terminal rate to 2.5%. The Euribor has already climbed from 2.2% in February to 2.8% in May, adding to financing costs for households.

Tourism provides a buffer

One bright spot is tourism, which is benefiting from a 'safe haven' effect as travellers avoid the conflict zone in the Eastern Mediterranean. Hotel revenues rose 4% year-on-year in the first four months of 2026, driven almost entirely by price increases of 3.8%, while occupancy edged up just 0.2%. The tourism lobby Exceltur estimates the redirection of visitors could add two percentage points to tourism GDP this year, worth around €4.2 billion. Santiago Vallejo of the Mesa del Turismo noted the sector's discomfort at benefiting from instability elsewhere, but confirmed Spain has capacity to absorb more visitors beyond the six most popular regions.

If the volume of reservations continues as seen in these first four months, we could reach 100 million tourists.