Spain's consumer price inflation eased unexpectedly in May to the lowest level in nearly two years, mainly due to a fall in fuel prices, flash estimates from the statistical office INE showed Tuesday.

The consumer price index, or CPI, climbed at a slower pace of 3.2 percent year-over-year in May after a 4.1 percent increase in April. Meanwhile, economists had expected inflation to rise to 4.4 percent.

The latest rate was the lowest since July 2021, when prices had risen 2.9 percent.

This development is mainly due to the decrease in fuel prices, which increased in May of the previous year, the agency said.

The slowdown in inflation was also influenced by lower prices of food and non-alcoholic beverages compared to last year.

Excluding non-processed food and energy prices, core inflation eased for the third successive month to 6.1 percent from 6.6 percent in April.  

On a monthly basis, overall consumer prices edged down 0.1 percent in May, reversing a 0.6 percent increase in the previous month. Economists had forecast a 0.1 percent increase.

ING economist Wouter Thierie said service sector inflation remains stubbornly high for now, though it is expected to start cooling structurally for the first time, especially after the summer months.

"We forecast an average inflation rate of 3.9 percent for all of 2023," Thirrie said.

"The expected slowdown in inflation can be attributed to lower energy prices and cooling food inflation, which will also dampen the pass-through effect of these components to the prices of other goods and services."

EU harmonized inflation moderated to 2.9 percent in May from 3.8 percent a month ago. The expected increase was 3.5 percent.

Month-on-month, the HICP dropped 0.2 percent, while prices were forecast to rise by 0.2 percent.

"Inflation in the euro-zone as a whole should eventually follow a similar path, but we would not jump to any conclusions about the rate for May, data for which are due on Thursday," Andrew Kenningham, a chief economist at Capital Economics, said.

Separate official data showed that Spanish retail sales growth eased to 5.5 percent in April from 9.9 percent in March.

Sales of non-food products grew by 14.3 percent annually in April, and those of food goods rose by 1.6 percent. Meanwhile, sales at service stations showed a decline of 4.8 percent.

Compared to the previous month, retail sales advanced 0.9 percent in April versus a 0.7 percent gain in the prior month.

In a separate report, ING economist Thierie said tourism will be a key driver of growth in Spain this year with household consumption declining and expected interest rate hikes dampening investment dynamics.

"Our forecast is for growth of 1.9 percent for Spain, surpassing the eurozone's expected growth rate of 0.5 percent," the economist added.

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