Bloomberg News

Spanish Core Inflation Surges as Rajoy Mulls Pension Hike

November 13, 2012

Spain’s underlying inflation accelerated in October after tax increases, adding to pressure on the government as it considers whether to risk the budget by compensating pensioners for higher living costs.

Annual core inflation, which excludes energy and fresh food prices, rose to 2.5 percent from 2.1 percent a month earlier, the National Statistics Institute in Madrid said today. That compares with a 2 percent median forecast of six estimates in a Bloomberg survey. Prices rose 1.3 percent from September.

Prime Minister Mariano Rajoy has set himself a December deadline to decide whether to raise pensions in line with inflation and which gauge of prices he should use to do so. As the government struggles to rein in the euro region’s second- largest budget gap, the statistics institute has created a new inflation measure that excludes tax increases.

Headline inflation was 3.5 percent, according to both European Union and Spanish calculations, matching an estimate published on Oct. 30. Excluding the impact of tax increases, the annual inflation rate based on Spanish calculations was 1.5 percent, falling to 0.5 percent if fresh food and energy were also stripped out.

Pensions Increase

The government increased pensions 1 percent this year in one of the few campaign pledges it kept since coming to power in December, and says it’s still considering whether to apply a law that obliges it to compensate pensioners for inflation above that level. It may change the indicator it uses to calculate prices, Deputy Economy Minister Fernando Jimenez Latorre said on Oct. 11.

The government has said it will decide on pensions once it sees the November inflation data, which INE will publish as an initial estimate on Nov. 30 and with a full breakdown on Dec. 13. Updating pensions in line with the headline rate, as set out in the existing law, would cost an additional 3 billion euros ($3.8 billion), according to the Bank of Spain.

The European Commission last week forecast the five rounds of tax increases and spending cuts Rajoy has implemented in less than a year won’t be enough for Spain to meet its deficit goals through 2014. The second recession since 2009, which has pushed unemployment above 25 percent and is undermining revenue, will continue next year, according to commission estimates.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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