Spain's Inflation Accelerates alongside Tax Increases

 

Spain's underlying inflation rate accelerated in September after the government increased sales tax as part of its efforts to slash the third-largest budget deficit in the euro region.

Core consumer prices, which exclude energy and fresh food, gained 1.1 percent from a year earlier, compared with an increase of 1 percent in August, the National Statistics Institute in Madrid said today. The headline rate, based on European Union calculations, was 2.1 percent, above an initial estimate of 2 percent published on Sept. 29.

Spain's government raised the main rate of value-added tax to 18 percent from 16 percent in July, as part of its efforts to cut the deficit to 6 percent of gross domestic product next year from 11.1 percent of GDP in 2009. The economy emerged from an almost two-year recession in the first half, though the Bank of Spain estimates the recovery slowed in the third quarter.

Excluding the effect of the tax increases, the EU- harmonized measure rose 0.7 percent in August from a year earlier, compared with the reported headline rate of 1.8 percent, INE said today. INE will give an estimate of the tax effect on September inflation in next month's report.

As households rein in spending to pay off debt accumulated during a 10-year housing boom, Spain's economy will contract 0.3 percent in 2010, while the euro area as a whole and the U.S. expand, according to the International Monetary Fund.

The government also forecasts a 0.3 percent contraction. It expects the economy to grow 1.3 percent next year, less than a previous forecast of 1.8 percent, because of the impact of austerity measures including public-wage cuts and a freeze on pensions.