Inflation hits its highest level in over two years

Spain barely left behind its worst recession in over half a century in 2010, and this year promises to be equally tough on cash-strapped households amid a freeze on pensions, lower public sector wages, higher prices and grim prospects for the labor market.

According to a flash estimate released Monday by the National Statistics Institute (INE), the harmonized index of consumer prices ended last year up 2.9 percent from the end of last year, the highest level since October 2008 when it stood at 3.6 percent. The rate in November of last year was 2.2 percent. By contrast the government estimates GDP contracted 0.3 percent in 2010.

The INE attributed the rise in December to higher tobacco and oil prices.

Taxes on tobacco were raised by between 24 and 50 percent at the start of December, while oil prices were up 7 percent from November and 23 percent from a year earlier.

At the same time, households are also bracing themselves for a record 9.8-percent hike in electricity rates, while regulated gas prices are also set to rise.

Public workers already saw their salaries cut by an average 5 percent from June of last year, while pensioners this year will have to forego any top-up of their benefits to compensate erosion in their spending power caused by higher consumer prices.

Those measures were introduced last year as part of the government's austerity drive to rein in the public deficit from 11.1 percent in 2009 to 6 percent this year.

With the unemployment rate almost double the average in the European Union at 20 percent, workers in the private sector have also agreed to wage moderation with the hope of holding on to their jobs. Collective agreements called for a 1-percent hike in salaries in 2010 and between 1 and 2 percent this year.

While the rest of Europe has also been hit by higher oil prices, inflation in Germany in December by contrast came in at only 1.9 percent.

The government expects inflation to remain at over 2 percent at the start of this year before easing to 1.5 percent by the end of 2011.

Funcas, the think-tank of the Spanish association of savings banks, believes the rise in consumer prices stems from the one-off measures introduced by the government to tame the shortfall in its books rather than a build-up of inflationary pressure.