Spanish inflation eased further than expected in August, but data showing a plummeting housing market and a worsening budgetary situation highlighted a key reason for the drop -- the faltering economy.

Spain’s EU harmonized inflation fell to 4.9 percent in August from 5.3 percent in July, marking the first decline since April, the National Statistics Institute reported in a preliminary estimate. That was well below a 5.2 percent median forecast in a Reuters survey of analysts.
The lower than expected price data came as the government said house sales dived 29.6 percent in June from a year earlier and mortgage lending plummeted 40.6 percent.
Another vivid example of the extent of the sudden slowdown in Spain, whose economy grew by 3.7 percent in 2007, came as the government revealed its budget deficit had swollen to almost 10 billion euros in the first seven months of the year.
Spain has been very hard hit by the credit crunch and the end of a property boom after a decade in which house prices tripled and, by its end, building far exceeded demand. Consumers have been left burdened by household debt greater than GDP and companies are also heavily indebted and laying off workers.
The Spanish inflation result preceded wider euro zone data on Friday expected to show inflation in the 15-member currency bloc fell to 3.9 percent in August from 4 percent in July, according to a Reuters poll.
----Cheaper oil helping
Spanish companies and retailers are slashing prices to make up for a steep fall in consumer spending after nearly half a million layoffs in Spain over the last year.
“It’s good news for prices, but leaves you with a bitter-sweet taste because of the implications for consumption,” said Jose Luis Martinez at Citigroup, who saw Spanish inflation falling as low as 3.8 percent by the end of the year.
Eurozone inflation seems to have peaked in July, analysts said, and the Spanish data reinforced the view the European Central Bank’s next interest rate move would be downwards, probably at the beginning of next year.
(Source: guardian.co.uk)