Spanish Inflation Fears

Rocketing fuel and food costs pushed Spanish year-on-year inflation to a 13-year high of 4.6 percent in May, compounding a severe economic slowdown and raising expectations of higher than forecast euro zone inflation.

Spanish consumer price inflation rose from 4.2 percent in April and analysts expected it to soar as high as 5 percent this summer given chances global oil prices will keep rising after touching a record $139 a barrel last week. May headline inflation was slightly lower than a Reuters forecast of 4.7 percent year-on-year rate but Spain's EU-harmonised rate of 4.7 percent was in line with expectations. On a monthly basis, Spanish consumer prices rose an expected 0.7 percent, compared to a 1.1 percent rise in April, the National Statistics Institute said.

Economists said Spanish and French data published on Wednesday confirmed another spike in May euro zone inflation which could exceed forecasts of 3.6 percent when data is published on June 16.

"Unless something dramatic happens, the chances we are going to have an interest rate hike are very high," said Stephane Deo, UBS chief European economist. "The Spanish economy is one of the most exposed to short-term interest rates, it will lose twice, once from high inflation, and then a hike from the ECB."

Spanish Prime Minister Jose Luis Rodriguez Zapatero on Saturday asked the European Central Bank to show prudence after its president Jean Claude Trichet warned of a possible interest rate hike in July. Economy Minister Pedro Solbes followed up Zapatero's remarks by saying in an interview with the Wall Street Journal on Wednesday that Spain was concerned by the short-term impact on economic growth of the ECB's comments about fighting inflation.

"There was some concern that these (Trichet's) comments were too strong," Solbes said, adding he understood the ECB had a mission to preserve economic growth in the long term by fighting inflation. "But it can have a short-term impact and without doubt we are more concerned by this in Spain."

Spain is falling into its worst economic slowdown in 15 years as the end of a decade-long construction boom coincides with the global credit crunch, soaring global oil prices, a strong euro and 8-year high mortgage borrowing costs. Analysts said Spain's economy was suffering far more than the wider euro zone where growth was reasonable while inflation races above an ECB target of just below 2 percent. "Zapatero has to understand the ECB's only purpose in life is fighting inflation," said Jose Garcia Zarate at the 4Cast consultancy. "It's not happy days for the Spanish economy."

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