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Inflation adds to Spanish woes with jump to 2.7 per cent

Spain's Prime Minister Mariano Rajoy gestures during his joint news conference with European Council President Herman Van Rompuy (unseen) after their meeting at Moncloa Palace in Madrid August 28, 2012.

SERGIO PEREZ/REUTERS

Spanish consumer prices surged in August driven by higher fuel costs and a value-added tax hike in September could drive another jump, complicating Spain's efforts to get out of recession and generate the growth needed to reduce its debts.

EU-harmonized consumer prices rose by 2.7 per cent year-on-year in August, flash data from the National Statistics Institute (INE) showed on Thursday, up from 2.2 per cent in July and much higher than a market consensus for an unchanged reading.

Prices could well rise further from September 1 when value-added tax rises to 21 per cent from 18 per cent, raising prices for consumers already struggling under the weight of falling wages and unemployment of almost 25 per cent.

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Spain also depends on imports for some 70 per cent of its energy needs, meaning higher fuel prices raise costs for businesses.

"We can see an energy cost effect here, but it might also be that some businesses have raised prices on products before the September VAT hike, so they can then say they haven't raised prices when it happens," said Nicolas Lopez, economist at M&G Valores.

He said inflation could rise as high as 3.7 per cent in September.

Spain's inflation figures come before those for the wider euro zone on Friday, which should show inflation at 2.5 per cent in August, faster than the 2.4 per cent rate seen in July.

That would be some way above the European Central Bank's inflation target of close to 2 per cent.

INE data also showed Spain's national consumer price index rose by 2.7 per cent in August on an annual basis, up from 2.2 per cent in July.

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