In this context, we expect internal demand to continue weakening over 2008. Indeed, the most recent economic projections released by the Bank of Spain show reduced GDP growth in 2008 and 2009. At the same time as we face a slowdown in growth, we are seeing sharp increases in headline inflation. These have been driven by large energy and food price rises at the global level. The price boom has affected Spain to a larger extent than some other countries, partly due to the higher relative weight of these items in household expenditure. And the Spanish economy may be more vulnerable than other countries to second-round effects due to the widespread existence of indexation mechanisms. I would like to make a few comments about what economic agents should and should not do to face these challenges. On inflation, the key issue is how firms and workers respond to the recent shocks. I would like to make two points: •  First, firms should not view the shocks as permanent. In other words, they should not consolidate price-rises over the longer term. •  Second, workers should understand that inflation cannot be offset by demanding wage increases that are not justified by productivity developments. This would just keep inflation persistently high, as the 1970s experience painfully showed. BIS Review 70/2008  1  From the perspective of GDP growth, if we are to see a quick return to our potential, we need flexibility in supply and demand responses.
Thus, goods CPIEFE inflation fell to 1.6% in November, that is, 2.1 percentage points less than in July, in a context where the exchange rate has fluctuated—give or take— between 650 and 680 pesos per dollar. Services CPIEFE inflation has declined at a more measured pace, in line with the moderate expansion of capacity gaps and its high content of indexed prices. In any case, it has accumulated a decline of a little over one percentage point in ten months. The low inflation for fresh fruits and vegetables was a surprise because of its atypical behavior compared with the known seasonal patterns (figure 1). Third-quarter activity figures continued to reveal limited strength. During the first three quarters of the year, sectors other than natural resources (i.e. Other GDP) grew slightly less than 2.5% annually, driven by services and trade, while construction and, especially, manufacturing performed rather poorly. Meanwhile, in the first three quarters, domestic demand—excluding inventory change—grew in tandem with Other GDP, driven by private and government consumption. Investment was better than expected, but in annual terms it was negative again, particularly due to the further deterioration of construction and other works (figure 2). The negative annual variation of the Imacec in October was unexpected. Beyond the volatility of month-to-month figures, the result is still strongly influenced by the poor performance of 2 / 19  BIS central bankers' speeches  mining, coupled with the weak performance of some industry lines (figure 3).