BALEARIC INFLATION STARTS TO STEADY OUT

In the Balearics, annual inflation is riding at 2.6 percent after prices rose by 0.5 percent in November.
Inflation hit the cost of clothing and footwear hardest in the Balearics, where prices rose by seven percent, but communication costs fell by 0.6 percent, culture and entertainment by 1.6 percent, hotel, restaurant and cafe prices fell by 0.2 percent while alcohol, cosmetics and tobacco also fell by 0.1 percent. Consumer prices rose 0.3 percent in the month, mainly because of a hike in clothing prices, while the year-on-year rate climbed 0.2 percentage points from October because of higher energy prices, Economy Secretary Luis de Guindos said. Eight million retired people were given a rise of two percent in January but the state now has to compensate them for inflation overshooting the original target, based on the November rate. The Labour Ministry said the cost amounted to 943 million euros. Half of that is for 2003 and comes out of this year's state budget while the rest is set aside for 2004 when the pension base will be higher. “This is not going to hurt the budget much...We expect the government to achieve its zero deficit next year,” said Estefania Ponte, economist at Fortis Bank in Madrid, based on an earlier rough estimate of the cost. Economists said Spain's headline inflation rate was reasonable and expected it to remain around the same level in December.
That is the month that determines final salaries in the private sector where 7.5 million workers with inflation-linked pay may be eligible for additional rises, depending on the terms of their collective agreements. October's inflation rate of 2.6 percent was a four-year low for Spain, whose inflation is habitually one of the highest in the euro zone, as is its economic growth. Euro zone prices rose 2.2 percent in November, EU statistics agency Eurostat's early estimate shows. That compares with Spain's harmonised inflation rate -which often differs by a 10th of a point from the national calculation -of 2.9 percent. Economists have long said the inflation differential will damage the competitiveness of Spain's exports, a third of which go to France and Germany.
Some are now warning of another problem that is reflected in the statistics institute's inflation figures.
Fierce price competition is apparent in industry, and must be eroding manufacturing margins, making the desirable recovery in investment look less and less likely. “In manufacturing we see greater price moderation typical of strong competition,” said David Martinez, economist at Analistas Financieros Internacionales. “In distribution or food retailing for example that is not the case.” Another economist highlighted industry's need to invest to remain competitive. “For me the most worrying thing is that Spanish industry is losing profit margin in order to gain market share,” said Citigroup economist Jose Luis Martinez. “This could mean there will be a big price to pay long term, once we enter the next economic cycle.” Spending on capital goods has at least moved into positive territory this year, after two years of decline, but growth rates are still low and industry is shedding jobs even though the economy as a whole is creating 300'000 a year.