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Spain's Underlying Inflation Rate jumps after IVA Increase

Thu 12th Aug 2010

Spain's underlying inflation rate increased last month after following an increase in IVA to help cut the third-largest budget deficit in the euro region.

Core consumer prices (which exclude energy and fresh food) increased 0.8 % on the previous year, compared to an increase of 0.4 % in June, the National Statistics Institute reported earlier today. The headline rate, based on European Union calculations, was 1.9 %, which is in line with estimates that were released on July 29.

Spain's government, struggling to reduce a deficit of 11.2 % of gross domestic product last year, raised the main rate of value-added tax to 18 % from 16 % in July, coinciding with the seasonal sales period. The economy emerged from an almost two-year recession in the first quarter and growth accelerated between April and June, the Bank of Spain estimated last week.

Spanish inflation generally had been above the EU average in the last decade. Its core inflation rate, which turned negative in April for the first time on record, compares with a euro-region average of 0.9 % percent in June.

As households pay down debt accumulated during a 10-year housing boom, Spain's economy will contract 0.4 % this year, while the euro area and the U.S. expand, according to the International Monetary Fund. The government cut its growth forecast for next year to 1.3 % from 1.8 % because of the impact of austerity measures. That's still twice the IMF's forecast of 0.6 % for next year.

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