Spanish Inflation Eased in August From a Decade High

By Emma Ross-Thomas

Aug. 28 (Bloomberg) -- Spanish inflation eased in August from the fastest in at least a decade as oil prices fell from a July record.

Consumer prices rose 4.9 percent from a year earlier based on European Union methods, the Madrid-based National Statistics Institute said in an e-mailed statement. That compares with 5.3 percent in July, the fastest since the EU measure began in 1997. Economists expected a 5.2 percent rate, according to the median of 11 forecasts in a Bloomberg News survey.

Oil prices, which drove up inflation globally, have fallen 19 percent from a record $147.27 a barrel on July 11. Still, Spanish consumer prices are rising faster than elsewhere in the euro region, where average inflation probably was 4 percent in August, according to a Bloomberg News survey.

``We expect a moderation in inflation in the rest of the year,'' said Jose Luis Martinez, an economist at Citibank in Madrid, who sees Spanish inflation ending the year at 4 percent to 4.5 percent. ``There's the effect of sharp rises in energy prices from September to December last year and also the impact of an economic slowdown.''

Spain's economy, which has grown faster than the euro zone for more than a decade on the back of a debt-fueled construction boom, expanded just 0.1 percent in the second quarter, the slowest rate since a 1993 recession.

Mortgage Lending

Higher interest rates have made mortgages more expensive just as banks have reined in lending. Mortgage lending, in terms of the amount of money lent, fell 37 percent in June from a year earlier while the number of mortgages issued for homes declined 37.7 percent, separate data from the statistics institute showed today.

Dominic White, an economist at ABN Amro in London, said today's inflation number was probably better than expected because of fluctuations in food and oil prices, and underlying inflation would take longer to come down.

``Generally I don't think you would expect to see core inflation respond so quickly to the moderation in growth that we've seen,'' he said. ``The headline number is below forecasts, but I expect most of that is the energy and food price story.''

European Central Bank council member Axel Weber said on Aug. 26 that there was no scope for interest-rate cuts and the ECB may need to raise borrowing costs once the economy emerges from its slump. The ECB, which aims to keep inflation just below 2 percent, held its key rate at a seven-year high of 4.25 percent on Aug. 7, even after the euro region's economy contracted in the second quarter.

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