Spanish inflation accelerated to the fastest pace on record in June as oil and food prices rose at very strong rates. According to the flash estimate consumer prices rose 5.1 percent from a year ago after increasing 4.7 percent in May, based on the European Union's calculation method, the National Statistics Institute (INE) said on Friday. That's Spain's fastest inflation since the harmonized methodology was introduced in 1997. 

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This is now most preoccupying, since it now makes an interest rate rise from the ECB all but inevitable (for a good view of the policy debate vis-a-vis the ECB see this extensive piece from Claus Vistesen on RGE Monitor). The problem is that this sort of inflation almost certainly can't last given the rate at which the Spanish real economy might be slowing, in which case we will get monetary tightening going straight into the recession, with a non negligible possibility of provoking outright price deflation as a consequence, so I really do hope the ECB think very seriously about some of the potential implications of what they may be about to do.

Spanish Retail Sales

Well the horror story just gets worse and worse, doesn't it? This time it is retail sales that are out there trying to test the bottom. Retail sales in Spain fell 5.3 percent in May from a year earlier (price corrected), led by a 12.2 percent drop in purchases of household goods, the Instituto Nacional de Estadistica INE said yesterday in Madrid.

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According to economists surveyed by Bloomberg, the Spanish economy faces a 45 percent probability of shrinking for two straight quarters before the end of 2009, up from 30percent last month. I don't know why people imagine we are going to have to wait till 2009 for this. I would say - looking at the retail sales and industrial output numbers - there must be a 50% possibility that Q2 2008 will show a q-o-q contraction, and its hard to find reasons to suggest why we should start expanding again in the next quarter, although we may well get some "bounce" in Q3 if the rate of contraction slows in some areas (it depends). In which case a good pair of candidates for straight q-o-q contraction might be Q4 2008 and Q1 2009. Of course both of these are before the end of 2009, so the economists saying this would be proved right in a very loose sense of the term.

Spanish Bank Lending

Spanish banks found more money to lend in April, and new lending on the month was up 6.755 billion euros, or a 10.3% year on year rate. This means that the banks have now been accessing new money at a more rapid rate virtually every month since last Decembers dramatic low. Of course what we don't know is how much they are having to pay to obtain this money.

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At the same time the year on year percentage increases in new lending have still been dropping since January 2007.

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