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UPDATE 2-Spain annual inflation highest in 2 yrs in Oct

By Sonya Dowsett and Manuel Maria Ruiz MADRID, Nov 12 (Reuters) - Spanish consumer prices rose 2.3 percent year-on-year in October, their highest since November 2008, due largely to the effects of rising energy prices in a country heavily dependent on fuel imports. The rise was marginally higher than expectations and outpaced September's 2.1 percent rise in consumer prices. Economists expect Spain's weak economy, with the highest unemployment rate in the euro zone of close to 20 percent, to dampen the pace of price rises in coming months. "The weakness of domestic demand leads us to believe that prices will come down to end the year at a rate of around 2 percent," said Fran Gonzalez, economist at Caixa Catalunya. Spain's economy stagnated in the third quarter with robust exports overshadowed by persistently weak domestic demand. Spain imports most of its energy needs. U.S crude hit its highest level since October 2008 on Thursday. EU-harmonised inflation was also 2.3 percent year-on-year, above forecasts and the highest in two years, data from the National Statistics Institute (INE) showed. That was also up on the 2.1 percent seen in September. Prices have risen in previous months thanks in part to a rise in value-added tax which took effect from July 1. EU statistics office Eurostat gave an early estimate of inflation for the euro zone as a whole last Friday, saying the annual rate rose to 1.9 percent in October from 1.8 the month before. But economists said this was not alarming as the rise was due mainly to food and energy prices and the rate remained within ECB tolerance levels. Spanish core inflation, which strips out the volatile movement of fuel and food costs was 1.1 percent in October, unchanged from September. Keywords: SPAIN INFLATION/ (Reporting by Sonya Dowsett; Editing by Giles Elgood; Reuters Messaging: sonya.dowsett.reuters.com@reuters.net; 34 91 585 8328) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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