A senior checks a notebook with her expenses after buying food in Moncalvillo de la Sierra, Spain
Madrid - AFP
Spain and Italy reported feeble increases in consumer prices in May on Friday, as the eurozone struggled with the spectre of an economically damaging deflationary spiral.
Spanish consumer prices rose at an annual rate of just 0.2 percent in May, held down by lower food and soft drink prices, said an initial estimate by the National Statistics Institute calculated in line with European Union norms.
Meanwhile inflation slowed by 0.1 point to 0.4 percent in May in Italy owing to lower food and transportation prices using EU norms, Istat said.
Inflation has been slowing this year in the 18 countries that share the euro, raising concerns about the possibility of deflation emerging.
It picked up marginally to 0.7 percent in April, but still well below the European Central Bank's target inflation rate of about two percent.
In a period of deflation, when consumer prices fall for a broad range of items over a sustained period, people and businesses tend to postpone purchases while hoping for further price declines in the future.
Deflation can thus push an economy into a vicious spiral of falling growth and rising unemployment, and it is notoriously difficult to reverse.
Consumer prices in Spain appear to be skirting in the danger zone, after declining by 0.2 percent in March and edging up by just 0.3 percent in April.
However low inflation, combined with slow growth, can also be a problem as it can discourage investment and make paying back debt difficult.
ECB president Mario Draghi said this week that the eurozone bank was alert to the risk of persistently low inflation.
Draghi told analysts in Sintra, Portugal that the eurozone's central bank expected low inflation eventually to return to close to 2.0 percent.
But the ECB had to be prepared for other outcomes, Draghi said, and markets are expecting the central bank will next week lower already record low interest rates and perhaps take other steps to boost lending.
The ECB targets inflation at just under 2.0 percent because of experience and theory which shows that this is what is needed to oil sustainable growth.
- Spanish trade balance setback -
If inflation rises above 2.0 percent, businesses and people anticipate future price rises. This can push up prices and wages, and causes a so-called second round of inflationary pressure.
The Bank of Spain also reported that the balance of payments showed a nearly doubled deficit in the first quarter of 8.2 billion euros ($11.2 billion) from 4.3 billion euros for the same period last year, blaming a sharp increase in the trade deficit.
The balance of payments of all cross-border flows is a closely watched measure of a country's ability to pay its way in the world, and a big component is the trade balance.
Spain, in common with other countries hard hit by the eurozone debt crisis, is counting on increased efficiency to boost exports and help drive growth.
The country, the third destination in the world for tourists, welcomed 10.1 million tourists in the quarter, an increase of 7.2 percent over a year. Last year it achieved a record of more than 60 million visitors.