Consumer prices climb to highest level since 1997 01/02/2008 00:00

Inflation in January estimated to have risen to 4.4 pc

1 February 2008

MADRID - Spanish inflation shot up to its highest level in over a decade in January as higher oil and food prices eroded consumers' purchasing power.

According to a flash estimated released Thursday by the National Statistics Institute (INE), the harmonised index of consumer prices accelerated to 4.4 percent in the first month of the year from 4.3 percent in December. That was the highest level since the HICP series began at the start of 1997.

The INE is due to release final figures for the month on February 15.

Inflation also rose in the euro zone. The European Union's statistics office Eurostat said yesterday its flash estimate for the single European currency bloc climbed to a record 3.2 percent in January from 3.1 percent the previous month.

The government has said inflation will start to ease from around the end of the first quarter as the base effect of higher oil prices disappears.

Economy Minister Pedro Solbes said the increase in inflation last month was in line with expectations and was likely to continue around the same level until March.

While the Federal Reserve has been cutting interest rates to prevent the US economy slipping into recession, the European Central Bank continues to focus on inflationary risks despite signs of a slowdown in the euro-zone economy.

Solbes said yesterday that the US rate cuts eased pressure on the ECB to raise its rates by depressing the dollar and thereby lowering the cost of imports in euro terms.

Inflation has been persistently higher in Spain than for its European partners. Analysts attribute this to wages being indexed to inflation and to bottlenecks in the retail distribution network. In its latest monthly economic bulletin released Wednesday, the Bank of Spain said the recent spike in inflation could "generate permanent effects on cost and price formation processes via the indexing mechanisms in place."

Meanwhile, the association of Spanish savings banks' think-tank Funcas cut its forecast for Spain's GDP growth for this year by a tenth of a point to 2.7 percent. The government recently lowered its target to 3.1 percent from 3.3 percent in the wake of the turbulence in the financial markets sparked by the US subprime crisis.

[Copyright EL PAÍS / A. SIM 2008]

Subject: Spanish news