Inflation last month hits highest two-year level in Spain

Inflation in Spain hit its highest level in over two years in December, eroding the purchasing power of consumers at a time when the economy is still trying to return to the path of growth after its worst recession in over half a century.

The National Statistics Institute said Friday the consumer price index climbed 0.6 percent from a year earlier as the annual rate jumped from 2.3 percent to 3.0 percent, its highest level since October 2008.

One of the main drivers of inflation was the price of oil, which touched $100 a barrel on Friday. But the government's austerity measures also had an impact in the wake of a hike in valued added tax from July and higher tobacco taxes.

With inflation in Germany also reaching a two-year high of 1.9 percent as the German economy grew strongly, the prospect of higher interest rates has begun to emerge, an eventuality that augurs badly for Spain as it seeks to fend off attacks on its sovereign debt from investors who question its creditworthiness.

With over a fifth of the working population out of a job, the average rise in wages last year in collective agreements covering seven million workers was only 1.3 percent. Almost half of those workers have no clause in their contracts compensating them for the loss of purchasing power because of inflation.

The rise in consumer prices will also badly hit public sector workers who were forced to take an average 5-percent cut in wages as part of the government's effort to rein in its yawning public deficit and appease the markets.