November in Spain: Inflation Drops to 2.7%

Spanish EU-harmonised inflation is expected to fall to a 14-month low of 2.7 percent in November from 3.6 percent in October due to weaker fuel and food costs and a brewing recession, a Reuters survey showed.

That would match October's 0.9 percentage point decline and narrow Spain's damaging inflation gap with the rest of the euro zone.

'Spain's consumer price index is very sensitive to food prices, together with the plunge in oil prices,' said ING Senior Economist Martin Van Vliet.

The Reuters survey had 6 forecasts ranging from a high of 3 percent to a low of 2.6 percent for the indicator to be reported at 0800 GMT on Friday by the National Statistics Institute.

Spanish inflation has traditionally run around a percentage point higher than the euro zone average, weakening Spain's competitiveness and gobbling up disposable incomes.

Spain is highly dependent on imported energy and its inflation rate is falling faster than those in most other euro zone countries.

Average euro zone consumer price growth is expected to ease to 2.4 percent in November from 3.2 in October, according to a Reuters poll. That indicator is also due to be published on Friday.

Spanish Prime Minister Jose Luis Rodriguez Zapatero sees weaker inflation and European Central Bank interest rate cuts sparking an economic recovery in the second half of 2009.

'Purchasing power is a major driver,' said Van Vliet.

Spain's economy, fourth largest in the euro zone, contracted for the first time in 15 years between July and September. The government sees a risk of a prolonged recession into 2009.

Some analysts fear Spain will not return to annual growth until 2011 as soaring unemployment and falling home prices sink household spending, which drives around 56 percent of GDP.

Spanish Economy Minister Pedro Solbes on Tuesday said he expected Spanish headline inflation to drop to 2.5 percent in November, fall to around 2 percent in December and hit a low of under 1 percent by July 2009 before rising again.

He said Spain had to avoid deflation at all costs.

Spanish house sales fell 30 percent in the third quarter as potential buyers waited for prices to fall further.

Spain will have up to 1.5 million unsold new homes by the end of this year, based on some private sector estimates, and developers and private owners may be forced into distress sales in 2009 as economic conditions worsen.

Retailers in Spain are being forced to offer pre-Christmas discounts to boost sales.

Story from Forbes

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