Energy tax shields lapse as inflation hits 3.2%

A household in Madrid paid roughly €8-10 more for electricity this month. Spain restored its VAT on power from 10% to 21% on June 1, ending an emergency tax cut that had shielded consumers since the Iran crisis sent energy prices surging (El Español). Across Europe, similar shields are coming down. Italy's fuel excise cut lapses June 6. Germany's fuel tax reduction runs out June 30. These withdrawals land just as eurozone inflation hit 3.2% in May, up from 3.0% in April (Eurostat).

Services drive the acceleration

Energy inflation barely moved between April and May, from 10.8% to 10.9%. The push came from services: restaurant bills, rents, insurance, haircuts. Services inflation jumped from 3.0% to 3.5%, and core inflation (prices excluding volatile energy and food) rose from 2.2% to 2.5% (ECB).

Central banks can't do much about oil prices set in global markets. Services inflation is different. It reflects domestic wages, rents, and business costs, what interest rate policy exists to fight. ECB chief economist Philip Lane acknowledged that "even if the initial energy shock reverses, the second-round effects will stay with us for some time" (Investing.com).

Who absorbs the cost

The eurozone average hides enormous variation. Lithuania recorded 5.1% inflation, driven by a 39.3% surge in diesel prices; the country imports all its oil and offers no fuel subsidy (LRT). Germany, cushioned by its temporary fuel tax cut, came in at 2.6%, though the Bundesbank estimates the subsidy alone holds the rate down by about 0.25 percentage points (Handelsblatt).

The divide sharpens in wages. German workers saw real pay grow +1.8% in Q1 2026, their nominal raises of 4.1% outpacing inflation (Destatis). Spanish workers got no such relief: collective bargaining agreements averaged 2.94%, below inflation, and only 30% of covered workers have automatic cost-of-living clauses (Europa Press). Italy and Greece show the same pattern. Every month the gap persists, purchasing power erodes.

Governments built these tax cuts as emergency responses to the Strait of Hormuz disruption, which pushed oil to around $105-111 per barrel (SEB). The fiscal cost has been vast. The European Commission put total committed measures above €14.5 billion, with 72% untargeted (European Commission). Now budgets are forcing a retreat. Italy's environment minister ruled out extending the fuel excise cut (Sky TG24, Askanews). Spain's Funcas projects inflation could reach 4% over the summer if subsidies are fully withdrawn and oil stays elevated (Funcas).

May's measured inflation still benefited from these shields. June and July readings will capture their removal, creating what economists call a step effect: a statistical jump that reflects the end of discounts, not any new price pressure.

Markets price an 85-91% probability that the ECB (the European Central Bank, which sets interest rates for the 20 eurozone countries) will raise its deposit rate by 0.25 percentage points on June 11, to 2.25% (VT Markets). Even Yannis Stournaras, the Bank of Greece governor and one of the Governing Council's most cautious voices, has called a hike "inevitable for credibility reasons" (Bloomberg).

If services inflation at 3.5% signals wages chasing energy costs, waiting risks letting price expectations settle permanently higher. But eurozone GDP grew just 0.2% in Q1 2026 (ECB), and consumer confidence sits at -19, near its lowest since December 2022 (Trading Economics). Raising borrowing costs squeezes households from both sides: higher energy bills and more expensive mortgages. The ECB hiked into a supply shock once before, under Jean-Claude Trichet in 2011, and reversed course within months as the debt crisis deepened. The subsidy withdrawal may crush demand on its own. The workers losing purchasing power in Madrid and Rome won't be the ones deciding.