Spain Deflation Risks Mount as Producer Prices Drop Annual 3.7%

Spanish producer prices plunged the most in more than five years last month, adding to concerns that the economy risks falling into a deflationary spiral.

Prices of goods leaving factories, refineries and mines dropped 3.7 percent in December from a year earlier, the National Statistics Institute in Madrid said today. Economists forecast a fall of 3.5 percent, according to a Bloomberg News survey. Prices fell 1.1 percent from the previous month.

“The drop in oil prices is having a knock-on effect on producer prices, which are closely linked to energy prices,” said Estefania Ponte, an economist at BNP Paribas Personal Investors in Madrid.

The Spanish government led by Prime Minister Mariano Rajoy has repeatedly denied the country is facing deflation, arguing that falling prices provide a boost in real income for Spaniards and domestic demand has accelerated in a predominantly export-led recovery.

Ponte said that Spanish private consumption is growing at more than 2.5 percent. “This is not a deflationary scenario in which consumers stop buying, it’s encouraging Spaniards to go out and shop,” she said.

Spanish consumer prices on an EU-harmonized basis fell an annual 1.1 percent in December from a year earlier, the most since July 2009. The decline probably accelerated to 1.1 percent this month, according to the median estimate of 22 economists in a Bloomberg survey. That would be the biggest drop since Bloomberg began collecting the data in 1997.

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