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Spanish January consumer prices in sharpest fall since 2009

[MADRID] Spanish consumer prices fell at their sharpest rate in five and half years in January, dragged down by tumbling energy costs feeding through to sectors including transport, in a development the government hopes will give the economy a boost.

Prices fell 1.3 per cent year-on-year, data from the National Statistics Institute (INE) showed on Friday, compared to a 1 per cent drop in December and a Reuters poll forecast for a 1.4 per cent decline.

That marked the biggest drop since July 2009.

National consumer prices have dropped for seven straight months, and economists have projected they will keep declining this year due to falling oil costs, in a country which imports most of its energy needs.

But core inflation, which strips out volatile food and energy prices, is back in positive territory, and the country's economic growth forecasts are also about to be raised.

Both those factors support the contention of the government and many analysts that Spain is not caught in a deflationary spiral in which consumers are putting off purchases as they await further price drops.

The same debate is playing out in the euro zone, where sub-zero inflation last month prompted the European Central Bank to announce a huge stimulus plan through government bond purchases.

Victor Echevarria, an economist with AFI, said Friday's Spanish number was as good as or slightly better than the Madrid-based financial consultancy had expected. "You're starting to see a recovery in services (prices) and core inflation, which is a better reflection of the development of domestic demand," he said.

Core inflation was 0.2 per cent year on year after also coming in at or below zero since last July.

Signs that falling price pressures are boosting households'purchasing power are supported by data showing consumer spending in Spain has been on the rise and savings are falling.

The government is also preparing to raise economic growth forecasts for this year, even as it predicts inflation will average around -1.0 per cent in 2015.

Spain's European Union-harmonised prices fell 1.5 per cent from a year earlier in January, according to the INE data, in line with Reuters forecasts and after dropping a revised 1.1 per cent in December.