Weekend Economists Take a Shot in the Dark, September 28-30, 2012

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11. VAT increase causes inflation to jump to 3.5 percent in September {spain}

http://elpais.com/elpais/2012/09/28/inenglish/1348843348_799321.html

The hike in the valued added tax rate at the start of this month pushed inflation to 3.5 percent raising the question of whether retirees will be compensated for the loss of purchasing power in their state pensions and the impact of this on the government’s deficit-reduction plans.

According to a flash estimate released Friday by the National Statistics Institute (INE), the consumer price index jumped from 2.7 percent in August to 3.5 percent in September, the highest level since May of last year. “This was mainly the result of an increase in prices in most of the sectors,” the INE said. The institute is due to publish a breakdown of the figures on October 11.

The government raised the standard VAT rate from 18 percent to 21 percent and the reduced rate to 10 percent from eight percent. It also moved items that carried the reduced rate to the standard rate.

The government is obliged to compensate pensioners for any increase in inflation above the official target level, which was one percent for this year. The government normally analyzes the situation based on the level of inflation in November. Analysts expect the impact of the VAT hike to continue to filter through in the next few months. A number of companies have said they will not pass the hike on to their customers.