Energy tax cuts expire as inflation hits 3.2%

A household in Madrid paid roughly €8-10 more for electricity this month. Spain restored VAT on power from 10% to 21% on 1 June, ending the emergency cut that had protected consumers since the Iran crisis pushed energy prices higher (El Español).

The same shield is being lifted elsewhere. Italy's fuel excise cut expires on 6 June. Germany's fuel tax reduction ends on 30 June. For Maltese readers, the mechanism is familiar: governments used tax to absorb part of the energy shock, and now the bill is moving back towards households. The timing is awkward. Eurozone inflation rose to 3.2% in May, from 3.0% in April (Eurostat).

Services drive the acceleration

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

That distinction matters. Central banks have little control over oil prices set in global markets. Services inflation is closer to home. It reflects wages, rents and business costs, the kind of domestic pressure interest rates are meant to cool. 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 hides 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 (LRT). Germany, cushioned by its temporary fuel tax cut, came in at 2.6%. The Bundesbank estimates that subsidy alone lowers the inflation rate by about 0.25 percentage points (Handelsblatt).

The wage picture is just as uneven. German workers saw real pay grow +1.8% in the first quarter of 2026, with nominal wage increases of 4.1% running ahead of inflation (Destatis). Spanish workers did not get the same protection. 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 that gap remains, purchasing power falls.

Governments introduced these tax cuts as emergency measures after the Strait of Hormuz disruption pushed oil to around $105-111 per barrel (SEB). The fiscal cost has been heavy. The European Commission puts 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). In Spain, Funcas projects inflation could reach 4% over the summer if subsidies are fully withdrawn and oil remains high (Funcas).

May's inflation number still benefited from those shields. June and July will capture their removal. Economists call this a step effect: a statistical jump caused by the end of discounts, rather than a fresh surge in underlying prices.

Markets now 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 11 June, to 2.25% (VT Markets). Even Yannis Stournaras, the Bank of Greece governor and one of the Governing Council's more cautious members, has called a hike "inevitable for credibility reasons" (Bloomberg).

The ECB's problem is that both choices carry a cost. If services inflation at 3.5% means wages are chasing energy costs, waiting could allow higher price expectations to settle in. But eurozone GDP grew just 0.2% in the first quarter of 2026 (ECB), and consumer confidence is at -19, close to its lowest level since December 2022 (Trading Economics).

Higher borrowing costs would hit households from two directions: dearer energy bills and more expensive mortgages. The ECB has tried this once before, when Jean-Claude Trichet raised rates into a supply shock in 2011, only to reverse course within months as the debt crisis deepened. This time, the withdrawal of subsidies may already be doing part of the damage. The workers losing purchasing power in Madrid and Rome will not be the ones making the decision.