Spanish Core Inflation Accelerates to Five-Year High

By Emma Ross-Thomas and Esteban Duarte

Aug. 13 (Bloomberg) -- Spanish core inflation accelerated in July to the fastest pace in more than five years as rising food and oil prices filtered through to other goods.

Consumer prices, excluding energy and fresh food, rose 3.5 percent from a year earlier, the most since December 2002, compared with 3.3 percent in June, the National Statistics Institute in Madrid said today in a statement. Economists expected prices to rise 3.4 percent, according to the median of 4 forecasts in a Bloomberg News survey.

Even with the economy stagnating because of a housing market collapse, Spain has one of the highest inflation rates in the euro zone. Spanish economic growth, which has outpaced the euro-region rate for more than a decade, likely slowed to 0.1 percent in the second quarter, according to economists surveyed by Bloomberg.

``Core inflation is going take much longer to moderate than the overall inflation rate,'' said Diego Fernandez, an economist at Fortis in Madrid. ``It's no longer just a problem of oil prices. Companies have started to pass on to consumers their higher costs.''

Spanish transportation costs gained 10.6 percent in July from a year earlier on higher fuel prices. Housing prices jumped 8.4 percent from the previous year as surging oil boosted electricity costs, the statistics institute said.

Energy Costs

Oil prices have risen 59 percent in the last year and reached a record $147.27 a barrel on July 11, boosting manufacturing and transport costs. Crude has fallen almost 23 percent from the July record, signaling that inflation may be reaching a peak.

``Oil permitting, we could see a change in the inflation trend in August,'' Deputy Finance Minister David Vegara told reporters today in Madrid.

Faced with rising inflation and slowing growth, the government is breaking off its traditional August vacation for an extraordinary cabinet meeting tomorrow to focus on the economy. In preparation, Prime Minister Jose Luis Rodriguez Zapatero will gather Finance Minister Pedro Solbes and six other ministers later today to discuss the economy.

Interest Rates

Prices have been rising across Europe. Inflation in the U.K. accelerated to the highest in more than a decade in July, while in France headline inflation remained at its highest for at least 12 years. The European Central Bank last month lifted its benchmark rate to 4.25 percent, the highest in seven years, to try to prevent rising oil prices from fueling broader price increases and wage demands.

In Spain some 68 percent of private-sector employees are covered by wage agreements that adjust for higher-than-expected inflation, according to ECB data. The Frankfurt-based bank warns against such deals, saying they further fuel price rises as inflation accelerates.

``The most surprising thing is that the core index has risen 0.2 percentage points,'' said Antonio Zamora, economist at Banco Urquijo in Madrid. ``This poses a certain risk that the second-round effects feared by the European Central Bank are starting to materialize.''

Spain's headline inflation rate, including food and energy costs and calculated by Spain's national standards, rose to 5.3 percent from 5 percent in June, the report said. Based on EU methodology, Spain's inflation rate for the month was also 5.3 percent, the highest in more than a decade. The number matched a preliminary report on prices released July 31.

While prices are rising, economists predict that the Spanish economy grew at the slowest pace since a 1993 recession in the second quarter. Growth may have slowed to 0.1 percent from 0.3 percent in the first three months, according to the median of 10 forecasts in a Bloomberg survey. Three of the economists predict a contraction.

Vegara said the government was not expecting the economy to shrink, according to the available data. The growth report will be released tomorrow at 9 a.m. in Madrid.

To contact the reporter on this story: Emma Ross-Thomas in Madrid erossthomas@bloomberg.net