Consumer price figures for November dispel fears of deflation

Consumer prices rose again in November after falling the previous month for the first time since the so-called “Great Recession,” helping to quell fears that Spain could face a period of deflation such as that experienced by Japan for more than a decade.

According to a flash estimate released Thursday by the National Statistics Institute (INE), the consumer price index (CPI) rose an annual 0.2 percent this month after declining 0.1 percent in October, the first time that had been the case since 2009, when the Spanish economy shrank 3.7 percent.

On a monthly basis, the CPI was flat compared with October. The harmonized index of consumer prices, which is used for comparative purposes with the rest of Europe, rose an annual 0.3 percent this month.

The INE also confirmed that the economy emerged from one of its longest recessions in decades in the third quarter of this year, with household spending notably picking up for the first time in six quarters.

Since pensions were raised by 1.0 percent retirees will gain spending power because of low inflation

The governor of the bank of Spain, Luis María Linde, earlier this month indicated that fears of deflation were exaggerated, pointing to the fact that low inflation helps offset wage contention by maintaining spending power, and improves the country’s competitiveness.

The rate of inflation in November is traditionally used to gauge whether state pensions need to be topped up to compensate for loss of purchasing power. However, since pensions were raised by 1.0 percent this year, retirees will in fact gain spending power because of low inflation.

Under the new system of annual reviews of state pensions, which links increases to the economic cycle, benefits are set to be increased by the minimum 0.25 percent next year.

The INE confirmed that GDP in the period July-September climbed 0.1 percent from the previous three months after nine quarters in negative territory. On an annual basis, output declined 1.1 percent. The flash estimate was for a fall of 1.2 percent. The annual decline in GDP in the second quarter was 1.6 percent. The government is forecasting a contraction of 1.3 percent for the full year.

Household spending rose 0.4 percent from the second quarter, while spending by the public administrations increased by 0.1 percent. Investment grew 0.2 percent after declining for three quarters in a row. As a result the negative contribution of domestic demand to GDP narrowed by 1.2 points from the previous three months to 2.5 percentage points.

However, the external sector lost a bit of steam, with its positive contribution to GDP declining to 1.4 percent points from 2.1 points in the second quarter. Annual growth in exports of goods and services slowed to 4.7 percent from 9.1 percent, while imports rose by only 0.7 percent, compared with 2.5 percent in the second quarter.

“Spain’s economic situation is starting to improve,” Bloomberg quoted Robert Wood, an economist at Berenberg Bank in London, as saying. “Business sentiment is picking up, unemployment is probably close to a peak and exports will continue to be a growth driver in the next year or two.”

The contraction in employment as measured in full-time jobs narrowed to 3.2 percent from 3.9 percent in the second quarter. Nonetheless, the economy shed 522,000 jobs in the third quarter compared with the same period a year earlier.

The services and construction sectors saw most improvement, with the decline in employment in the former easing to 2.1 percent from 3.0 percent, while in the latter the fall was reduced to 11.6 percent from 14.4 percent.

Apparent labor productivity growth per job increased to 2.4 percent from 2.1 percent in the second quarter, while unit labor costs declined 1.9 percent, 2.3 points less than the implicit GDP deflator, a measure of inflation.