Market Commentary and Intraday News

Spanish HICP Inflation Quickens In July

35 days ago

(RTTNews) - Spanish inflation, as measured by the harmonized index of consumer prices, rose at the fastest pace since November 2008 in July, official data showed Thursday. The increase was apparently driven by a hike in the value added tax, effective July 1.

Annual inflation accelerated to 1.9% in July from 1.5% in June, a flash estimate of the statistical office INE showed. Economists had predicted an inflation rate of 1.7%. The rise in the overall index was also influenced by higher prices of food and non-alcoholic beverages, gas and package holidays.

"It seems that the VAT hike was the main driver of the year-on-year increase in consumer prices," Philippe Sabuco, an economist at BNP Paribas said in a note. "Month-on-month, consumer prices probably decreased 0.5%, driven by summer sales, after a 0.2% rise in June."

However, headline inflation is likely to rise further in the coming months, in line with rising oil prices, the economist noted. In the coming quarter, weak domestic demand and rising unemployment rate may put core prices, which exclude energy and fresh food, under pressure, Sabuco said.

Earlier this month, Spanish Prime Minister Jose Luis Rodriguez Zapatero said the domestic economy is expected to have grown in the second quarter after emerging from the recession in the first quarter. However, the recent budget reduction measures is likely to weigh on growth in the latter half of the year. The government hiked the VAT rate to 18% from 16%, which came in force from July 1.

Spain's socialist government is trying to reduce its huge budget deficit, which is the third biggest in Eurozone. The Spanish economy expanded 0.1% sequentially in the first quarter, growing for the first time since early 2008. However, the country's government foresee 0.3% contraction this year before expanding 1.3% next year.

Meanwhile, yesterday's retail trade data showed a surprise increase in sales in June as consumers rushed to buy household goods ahead of the increase in VAT. Sales rose a price-adjusted 0.9% year-on-year in June, following 1.7% decline in May.

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