Bank of Spain raises inflation forecast to 3.9% as energy crisis and Middle East war pressure prices

The Bank of Spain's latest economic outlook report raises the inflation rate by 0.3% for 2026, to 3.9%, and by 1.1% for 2027, to 3.7%, although it warns that prices could rise even further, exceeding 4% over the two-year period, if tensions escalate.

The Spanish financial authority warns that the rise in inflation in recent months has been more pronounced than that recorded in the EMU (European Monetary Union). This sharper rise is mainly driven by energy inflation, which soared by 22% in September compared with the same month in 2025.

The measures approved by the government have succeeded in containing the rise in energy prices to some extent. Indeed, without this package, average inflation would have exceeded the rate in the April-August period by almost 10% and would have been higher than that of the EMU.

The measures of the government are helping to keep inflation in check, but also driving up the public deficit. The body estimates that the combined cost of the three packages amounted to 0.52% of Spain's GDP, representing approximately 8.78 billion euros, while also achieving direct savings for households estimated at around 3.67 billion euros or 0.21% of GDP.

However, the impact of the aid on public finances will increase the government's deficit by 0.25% this year, although this will be somewhat offset by the macroeconomic improvement (-0.1%).

In summary, the Bank of Spain forecasts an increase of 0.2% compared with its previous projection, to 2.6%, and 2.2% for 2027, an increase of 0.1%.

Meanwhile, food prices have remained stable thanks to subsidies for producers to purchase diesel and fertilisers, as well as the absence of widespread drought problems in Spain. Despite this, prices rose in August and September due to an increase in fresh produce, which rose by 2.7%.

The year will end with a general inflation rate of around 5% once the effects of the energy tax measures are taken into account, in line with the preliminary CPI figure of 4.9% for September. For its part, the core inflation rate will also remain high in the coming months, closing at 3.4% this year and 3.5% next year, 0.2% and 0.3% higher, respectively, than the June projection.

Despite the rise in prices, the Spanish economy will remain resilient thanks to strong domestic demand, particularly private demand and investment. The strength of economic activity in the second quarter and the prospect of this continuing into the next, with growth of around 0.6%, will offset greater international uncertainty and a less favourable monetary policy.

Consequently, the Bank of Spain has revised this year's GDP growth forecast upwards by 0.3% to 2.6% and that for 2027 by 0.5% to 2.2%, partly due to increased investment in housing. However, the Bank warns that rising geopolitical tensions could push this year's inflation up to 4.1% in the worst-case scenario and to 4.6% next year. The economy would also suffer the impact, with growth falling to 2.5% this year and 1.6% over the two-year period.

Meanwhile, wages are trending positively and are expected to rise by an average of 3.7% next year, in line with the inflation forecast in a labour market that is expected to moderate in the coming months. The number of employed people will increase by 2% by the end of the year, 0.2% higher than the previous forecast, while growth will reach 1.8% in 2027, 0.3% point higher.

The unemployment rate will continue its downward trend observed in recent years, although its rate of improvement will slow over the projection horizon, with a projected decrease of 0.5% in 2026 and 0.3% the following year.

Looking ahead to 2027, residential investment will enter a more dynamic phase compared with this year, driven by the increase in the number of housing starts from 2024 onwards and the trend in new bank financing for construction and property development activities.

The processing of planning permissions and the completion rate for new homes will improve next year, but this will depend on the persistence of structural constraints, such as labour shortages, the slow pace of urban development and a shortage of land zoned for development.

Spain maintains a significant gap between housing starts, around 140,000 per year, and completed units, around 100,000. While the number of starts has increased compared to previous years, the completion rate remains virtually unchanged. Authorities do not expect the market to see a surge in new housing tenders until 2028 and maintain their housing deficit target of one million homes for that year.

Track regional finance, business and economy news