(Aug 29): Spanish inflation eased to its lowest level in a year — a retreat that’s likely to be mirrored across the eurozone, allowing the European Central Bank (ECB) to continue lowering interest rates.

Consumer prices advanced 2.4% from a year ago, according to data published on Thursday by the national statistics agency. That’s less than the 2.5% median estimate in a Bloomberg survey of economists.

The third straight monthly slowdown came thanks to lower fuel costs, as well as those of food and non-alcoholic beverages. A gauge of underlying pressures that strips out energy and some food prices, moderated to 2.7%.

“Spanish inflation took another leg down in August and will probably touch the ECB’s 2% target next month. But not for long. After driving much of the fall in price gains, energy base effects will start working in the opposite direction later in the year. We forecast headline inflation to gradually tick up to just below 3% by year-end, also pushed up by tax cut reversals,” said Ana Andrade, economist at Bloomberg Economics. 

Spain’s data are part of what analysts reckon will be a broad-based decline in inflation in the 20-nation euro area. Figures due later on Thursday will confirm whether that’s the case for the region’s largest economy, Germany. Friday includes reports from France, Italy and the bloc as a whole, where prices are estimated to have risen by 2.2% this month versus 2.6% in July.

Softer inflation numbers on Thursday from Germany’s regions led traders to slightly increase bets on ECB rate cuts, pricing about 69 basis points of easing through year-end. German bonds flipped to gains and the euro erased an earlier advance to hit its lowest level in more than a week at US$1.1072.

Another reduction in borrowing costs by the ECB on Sept 12 is looking likelier after policymakers signalled their openness to such a move.

In Spain, the government has been phasing out assistance to offset the inflation that erupted after Russia invaded Ukraine, though it’s retained some initiatives — like free-public transportation for commuters. 

The economy overall is in good shape as record tourism and strong exports deliver one of Europe’s fastest growth rates. Job creation is also strong, with unemployment near its lowest level in about 17 years. 

Fiscal policy is providing a headwind, however. The government’s inability to pass a budget is hampering its economic goals, with last year’s spending plan being used until the political squabbling is settled.

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