Spanish Prices Fall, Risking Deflation
June 12th, 2009
Spanish CPI -0.9 pct yr/yr in May, new 57-yr low – Core inflation falls to 0.9 pct, raises deflation fears – Gov’t sees risk of negative inflation until end of autumn.
Spanish consumer prices fell by a record 0.9 percent in May, deepening a three-month decline and raising the risk of deflation in Spain during its worst recession in 50 years.
The year-on-year fall was the steepest in 57 years and followed a 0.2 percent decline in April. In month-on-month terms, prices were flat after a 1 percent rise the month before, the National Statistics Institute reported. The annual rate was the lowest in the current data series which began in 1962.
Spanish inflation was negative in March for the first time since 1952, according to Bank of Spain data, but analysts expect the headline rate to rebound by year end on higher energy prices.
Economy Secretary Jose Manuel Campa said inflation was likely to stay negative for months.
“We’ll probably see negative inflation for a few months, until the end of autumn at least,” Campa told reporters. But he stressed: “Deflation, a generalised fall, we’re not seeing that right now. In our scenarios we don’t see any possibility of deflation.”
Worrying economists was an underlying inflation rate – which cuts out fresh food and energy components – that fell to 0.9 percent year-on-year from 1.3 percent a month earlier as firms cut prices in response to shrivelling demand.
“This idea that you’ll see a rebound in headline inflation from energy remains valid, but this is offset at least partially by the decline in core inflation, and we think very easily you will have deflation next year,” said economist Luigi Speranza at BNP Paribas in London.
Consumer prices in Spain have traditionally risen faster than the euro area average but are now falling more sharply than in the rest of the currency bloc after Spanish domestic demand fell 5.3 percent in the first three months of the year.
Spain is suffering the twin impact of a Spanish property market collapse and the global crisis that has sent the unemployment rate to by far the highest level in the European Union at 18.1 percent in April, according to Eurostat data.
Economist Ben May saw Spanish wage inflation heading towards zero and said Spain, the euro zone’s fourth-largest economy, was among the most vulnerable to deflation.
“You’re more likely to see a period of deflation in Spain, also Ireland is ripe for it, their core inflation has already turned negative,” said May, from Capital Economics in London. Others ruled out such a scenario after May data.
“This figure shows economic weakness, but I don’t see deflation despite the fall in underlying inflation, despite the strong deflationary pressures. We see prices picking up after the summer,” said Jose Luis Martinez at Citigroup.
Rates of decline in Spanish retail sales, industrial production and car registrations have come off record lows and the Spanish government expects inflation to turn positive by year end.
Both the Socialist government and Bank of Spain ruled out deflation, or prolonged, generalised price decline.
German consumer prices were unchanged year on year in May after a preliminary estimate of a 0.1 percent decline, data showed on Wednesday. Euro zone inflation fell to zero for the first time in the bloc’s history during May, according to preliminary data.
The European Commission expects Spain’s economy to contract 3.2 percent this year and 1 percent in 2010 as unemployment hits 20.5 percent, making Spain the last country in the European Union to emerge from recession, probably in 2011.
Story from The Guardian
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