Spain Core Eases to 2.8%, Services Surge Narrows ECB Cut Room

Annual headline inflation remained elevated, driven overwhelmingly by transportation prices, which surged 6.5% compared to April 2024. The increase was concentrated in fuel and lubricants for personal vehicles, directly tied to the rise in global crude oil since the US-Iran conflict escalated. Spain, as a net energy importer, is particularly exposed to this channel.

For the European Central Bank, the Spanish data removes some of the disinflationary narrative that had anchored expectations for a June rate cut. While a single country print does not dictate eurozone policy, Spain is the fourth-largest economy in the bloc and its inflation dynamics often lead the periphery. The transmission from higher energy costs to core services is the exact mechanism that ECB hawks have warned about. ECB officials have already flagged that a sustained oil surge could force a rethink of the rate path. If the Middle East conflict keeps energy costs elevated, the pass-through to transportation, followed by hospitality and retail, will keep the ECB’s 2% target out of reach for longer than markets currently price.

Euro Holds Firm as Cut Timeline Narrows

The EUR/USD pair has been caught between a Federal Reserve pushing back rate-cut expectations and an ECB that had been signalling a June move. Spain’s inflation numbers do not derail a June cut on their own. They do, however, narrow the path for a series of cuts through the second half of 2025. Rate markets trimmed the probability of a follow-up cut in July, limiting the euro’s downside as the repricing unfolds.

The ongoing Middle East conflict threatens to keep energy prices elevated, which would widen inflation pressures and spill over to core prices in the coming months. The next catalyst is the eurozone-wide flash inflation estimate for April. A core reading that stalls or rises would force a more hawkish ECB communication at the June meeting, reinforcing the case that the euro’s decline against the dollar has limited room to run.