Spanish consumer prices fell in July at the steepest rate since records began in 1962 but were expected to have hit bottom as oil and food prices recovered. Consumer prices were down 1.4 percent year-on-year in July, final National Statistics Institute data showed on Thursday, in line with economists' forecasts.
In month-on-month terms, inflation was negative 0.9 percent, also in line with forecasts. Headline inflation will likely turn positive again by the end of the year as base effects from last year's steep rises in energy and food prices dissipate. "If energy prices remain at levels seen recently .... we'll still see annual inflation with negative rates over the next few months, but less so, and positive rates by the end of the year," Economy Secretary Jose Manuel Campa told reporters.
Core inflation, which strips out energy and food, was 0.6 percent year-on-year, a record low which fuelled concerns headline prices could remain depressed. In Spain there is a risk of prolonged negative prices, or deflation, economists warned, even amid signs the European economy may be on the mend after Germany and France surprised markets with positive growth in the second quarter on Thursday.
Campa said the German and French growth figures were a positive development, but should be looked at with caution. "This confirms predictions that the rate of the contraction of the global economy should slow in the second quarter. This is also true for Spain."
Spain reports second quarter gross domestic product data on Friday, with the Bank of Spain predicting a quarter-on-quarter contraction of 0.9 percent and an year-on-year fall of 4 percent. Economists warned however that Spain's problems were mostly domestic and improved growth elsewhere in Europe would not necessarily be repeated here. "Even if Germany and France continue to expand from now on ... it wouldn't necessarily mean that that would pull Spain out of its current slump and that means deflation worries are still relevant," said economist at Capital Economics Ben May. Spain's government reiterated it did not expect Spain to enter into a period of deflation over the next few months.
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