Inflation remains low as domestic demand still languishes

The pace of the recovery of the Spanish economy in the last quarter of the year may have picked up but according to the latest inflation figures domestic demand appears still to be languishing at the start of 2014.

According to a flash estimate released Friday by the National Statistics Institute (INE), the consumer price index declined 1.3 percent in January from December as the annual rate slowed to 0.2 percent from 0.3 percent.

Annual inflation has now remained under 0.5 percent for the past five months and is well below the euro zone average. The European Union’s statistics office Eurostat said Friday that annual inflation in the single-currency bloc slowed to 0.7 percent in January from 0.8 percent in December.

The INE said the main reason for the easing of inflationary pressure was a decline in fuel and oil prices compared with a year earlier. That would suggest that core, or underlying inflation, which factors out volatile food and energy prices, remained at 0.2 percent at the start of the year.

The INE confirmed on Thursday that GDP quarterly growth accelerated to 0.3 percent from 0.1 percent in the previous three months as a result of a “less negative contribution from domestic demand and a positive, albeit lower, contribution from external demand.” That is to say that the recovery is still being driven by the export sector, with consumers keeping a tight rein on their purse strings because of high unemployment and falling wages.

The European Union commissioner for economic affairs, Olli Rehn, on Friday said that low inflation would have a negative impact on debt servicing in the southern countries in the euro zone.