Spain Reports Weak Inflation in May

Spain reported Friday a feeble increase in consumer prices in May 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. 

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 -- still well below the European Central Bank's target inflation rate of about two percent.

ECB president Mario Draghi said this week 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.

"What we need to be particularly watchful for at the moment is, in my view, the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries," he said. 

Inflation in the 18 countries that share the euro picked up only fractionally to 0.7 percent in April.

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.

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.