Spanish Inflation Quickens to 5.1%, Fastest on Record
Spanish inflation accelerated to the fastest pace on record in June as oil and food prices surged.
Consumer prices rose 5.1 percent from a year ago after increasing 4.7 percent in May, based on the European Union's calculation method, the Madrid-based National Statistics Institute said today. That's the fastest inflation since the harmonized methodology was introduced in 1997.
Inflation in the euro region quickened to the most in 16 years in May, prompting European Central Bank President Jean- Claude Trichet to say the bank may raise the key rate to tame prices even as growth wanes. ECB Council Member and Bank of Spain Governor Miguel Angel Fernandez Ordonez said today pressures on growth mean a rate increase isn't a certainty.
“The problem is that amid record oil prices, salary negotiations are also adding pressure,'' said Jose Carlos Diez, chief economist at Intermoney SA in Madrid. “Should oil prices remain high, inflation will continue to be a problem in 2009.''
The price of crude oil gained 47 percent this year and touched a record $141.71 a barrel in after-hours trading on the New York Mercantile Exchange. Corn, wheat and rice prices have all reached records this year.
Rate Decision
Trichet reiterated June 25 that the bank may raise the key rate a quarter point to 4.25 percent in July. Inflation in the euro area quickened to 3.7 percent last month, well above the ECB's 2 percent target. The ECB's 21-member rate-setting Governing Council is scheduled to hold its next meeting on interest rates on July 3 in Frankfurt.
The jump in prices is weighing on consumer optimism and spending, sapping economic growth. Confidence among European executives and consumers dropped more than economists forecast this month after inflation accelerated and the ECB signaled higher rates, a report release by the European Commission showed today.
Higher money market interest rates are weighing on Spain's economic expansion, as the collapse of the country's house- building industry combine with surging food and energy costs to stifle consumption.
Recession Possible
The Spanish economy faces a 45 percent probability of shrinking for two straight quarters before the end of 2009, up from 30 percent last month, according to the median response from 18 economists surveyed by Bloomberg News.
The inflation rate “is a very bad and very worrying, but it's difficult to draw too many conclusions from it,'' Jose Luis Martinez, a strategist at Citigroup Inc. in Madrid, said. “The strike may have been an important factor.''
Fuel and food supplies around Spain were disrupted by a weeklong strike by transport workers this month who were demanding government support to help them weather the surge in fuel costs.
Retail sales in Spain fell 5.3 percent last month from a year earlier, led by a 12.2 percent drop in purchases of household goods, the Instituto Nacional de Estadistica INE said today in Madrid.
“Nothing is inevitable in life,'' Ordonez told reporters in Rome today. “What we said was that the increase is not certain, but possible.'' Surging crude oil prices mean “more inflation, less growth.''
Investors are still betting the ECB will raise rates twice this year, taking the benchmark to 4.5 percent in December, Eonia forward contracts show.
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