Energy tax breaks expire as inflation hits 3.2%

A household in Madrid has just been given the first bill for the end of Europe’s energy-tax reprieve: roughly €8-10 more for electricity this month. Spain restored VAT on power from 10% to 21% on June 1, unwinding an emergency cut introduced after the Iran crisis drove energy prices sharply higher (El Español).

The same thing is now happening across the eurozone. Italy’s fuel excise cut expires on June 6. Germany’s fuel tax reduction runs out on June 30. These supports are being removed just as eurozone inflation rose to 3.2% in May, up from 3.0% in April (Eurostat).

Services drive the acceleration

Energy inflation itself barely shifted between April and May, moving from 10.8% to 10.9%. The pressure came from services: restaurant bills, rents, insurance and haircuts. Services inflation jumped from 3.0% to 3.5%, while core inflation, which strips out volatile energy and food prices, rose from 2.2% to 2.5% (ECB).

That distinction matters for the European Central Bank. Oil prices are set in global markets, far beyond Frankfurt’s control. Services inflation is closer to home. It reflects wages, rents and business costs, the kind of domestic pressure interest-rate policy is designed to restrain.

ECB chief economist Philip Lane put it plainly: "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 conceals a wide split. Lithuania recorded 5.1% inflation, driven by a 39.3% rise in diesel prices. It imports all its oil and has no fuel subsidy to soften the blow (LRT).

Germany, protected for now by its temporary fuel tax cut, came in at 2.6%. The Bundesbank estimates that the subsidy alone is holding inflation down by about 0.25 percentage points (Handelsblatt).

The labour market tells the same story in a more personal way. German workers saw real pay grow by +1.8% in the first quarter of 2026, with nominal wage increases of 4.1% running ahead of inflation (Destatis).

Spanish workers have had a different year. 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. Each month the gap remains, wages buy a little less.

Governments built these tax cuts as emergency shields after the Strait of Hormuz disruption pushed oil to around $105-111 per barrel (SEB). The bill was large. The European Commission put total committed measures above €14.5 billion, with 72% of them untargeted (European Commission).

Budgets are now forcing the retreat. Italy’s environment minister has ruled out extending the fuel excise cut (Sky TG24, Askanews). Spain’s Funcas expects inflation could reach 4% over the summer if subsidies are fully withdrawn and oil remains elevated (Funcas).

May’s inflation figure was still flattered by these shields. June and July will show what happens when they come off. Economists call this a step effect: a statistical jump caused by the removal of discounts, rather than a fresh burst of underlying price pressure.

Markets now see an 85-91% chance that the ECB, 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, governor of the Bank of Greece and usually one of the more cautious voices on the Governing Council, has called a rise "inevitable for credibility reasons" (Bloomberg).

If services inflation at 3.5% means wages are now chasing the energy shock, delay carries a risk: price expectations could settle higher. But the eurozone economy is barely moving. GDP grew just 0.2% in the first quarter of 2026 (ECB), and consumer confidence is at -19, close to its weakest level since December 2022 (Trading Economics).

For households, including Irish mortgage holders watching Frankfurt as closely as their own bank, a rate rise would squeeze from both sides: dearer energy and dearer credit. The ECB tried raising rates into a supply shock before, under Jean-Claude Trichet in 2011, and reversed within months as the debt crisis deepened. This time, the withdrawal of subsidies may already do part of the work by cutting demand. The people losing purchasing power in Madrid and Rome will have no vote in that decision.