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Spain inflation hits two-year high of 3.0 percent

Spain’s annual inflation rate hit a two-year high of 3.0 percent in January, official data showed Tuesday, in more bad news news for the sluggish, jobs-scarce economy.

Higher transport, tobacco and alcohol costs drove inflation up from 2.9 percent in December, the National Statistics Institute said.

It was the highest inflation rate since October 2008 when prices climbed 3.6 percent annually, pushed up at the time by soaring oil prices.

Driven now by food and energy costs, prices appear to be on the rise across large parts of Europe.

The European Central Bank has a medium-term inflation target of below but close to two percent for the entire 17-nation eurozone and the issue will be closely watched going into its next policy meeting.

The ECB believes that eurozone inflation, which hit 2.4 percent in January, will fall later this year, thus easing the pressure for an immediate interest rate hike. Nonetheless, economists expect the ECB to start tightening monetary policy later this year, taking rates up from their record low 1.0 percent.

Higher interest rates increase the cost of credit and tend to slow economic activity, which could be a serious threat to struggling economies such as Greece, Ireland, Portugal and Spain.

Spain is already beset with feeble economic growth, failing to generate enough jobs to cut the highest unemployment rate in the industrialized world — 20.33 percent at the end of 2010.

The Spanish economy, the European Union’s fifth biggest, slumped into recession during the second half of 2008 as the global financial meltdown compounded the collapse of a labour-intensive construction boom

It emerged with meagre growth rates in the first half of last year and posted a contraction of 0.1 percent for all of 2010.

The government has forecast growth of 1.3 percent in 2011, well above the International Monetary Fund’s prediction of 0.6 percent.

Prime Minister Jose Luis Rodriguez Zapatero last week acknowledged that rising inflation was “worrying” but said there was “reasonable expectation” of a dip in the coming months due to lower fuel prices.

The Bank of Spain has predicted an inflation rate of 1.7 percent for 2011.