Research Dept. News
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Monthly Report, num 328 - October 2009
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Spain: overall analysis - Prices
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Drop in prices easing
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Consumer price index still in negative terrain.
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As expected, August brought a break in the downward trend in the annual change rate of the consumer price index (CPI) that began 12 months earlier. In fact, this rate rose in August after the CPI had marked up the biggest year-on-year drop in recent decades in July. The CPI rate continued negative in August (0.8%) although this was 6 decimals less than in the month before.
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This turnaround may largely be explained by the swings in prices of oil and other commodities in recent times. Fuels and fuel-oils thus contributed 7 decimals to the increase in the year-on-year CPI rate in August going from an annual drop of 22.5% in July to 15.6%.
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Nevertheless, the more stable core in price changes, so-called underlying inflation that excludes unprocessed foods and energy products, continued to go down dropping by 2 decimals in August to reach 0.4%. This course partly reflects the pass-through of the earlier drop in commodity prices but also the downward pressures arising from the contraction in consumption with the subsequent lowering or easing of prices by companies in order to stimulate sales. This is also reflected in the gross domestic product deflator which in the second quarter rose by only 0.1% year-on-year.
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Downward base pressures persist as result of contraction of consumption taking underlying inflation to 0.4%.
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Returning to underlying inflation, all its main components were down in August although only non-energy industrial goods showed a minus sign. These goods sharpened their drop in prices to 1.8% annual thus contributing minus one decimal to the year-on-year change in the CPI. As well as a result of the weakness of consumption, this drop was due to strong competition in international markets. Sales campaigns thus ended with reductions somewhat greater than 12 months ago and clothing and footwear showed a year-on-year decrease of 2.2%. In turn, car prices showed a year-on-year drop of 5.8%, some 1.6 points more than in July.
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Inflation in services also easing.
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While more sheltered from competition, services were unable to escape the effects of lower demand and prices continued to drop going down to 1.9% annual in August, the lowest rate in recent decades. Organized travel rose less than in August 2008 dropping by 2.7% compared with the same month last year.
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The European Union harmonized consumer price index ran along the same lines as the CPI and also marked up a year-on-year drop of 0.8% in August. As a result, the negative differential with the Euro Area continued to narrow going to 0.6 percentage points, three decimals less than that record in May, as a result of the greater weight of fuels in the Spanish shopping basket and lower taxes on fuels which increase the impact of price increases in these products.
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Inflation to again go into positive terrain toward end of year.
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With regard to prospects for the trend in prices, while the downward trend in underlying inflation could continue, in coming months it is likely that the effect of the rise in fuels will show up to a greater extent. As a result, it is foreseeable that the annual change will be less and less negative and that toward the end of the year it will go back to positive terrain.
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Wholesale prices show record drops
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Producer prices sharpened their downward trend in July marking up the biggest year-on-year drop in recent decades (6.7%). This trend reflected the course of commodity prices, especially for oil, which in July 2008 had shown a record.
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Farm prices at origin collapsing.
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The decrease in import prices was even greater as it marked up a year-on-year decrease of 11.2%, a factor contributing to this being the appreciation of the euro in the past 12 months. In turn, farm prices at origin collapsed recording a year-on-year drop of 17.2% in June. All main components showed year-on-year decreases although the biggest drop came in agricultural products (24.7%).
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