By Andrew Hay
MADRID, April 15 (Reuters) - Spanish consumer prices posted their first annual fall in 47 years in March, beginning an expected period of decline that could cut crippling costs but might also turn into long-term deflation.
Spain's March consumer price index fell by 0.1 percent from a year earlier, marking the first annual decline in records dating back to January 1962, final data from the National Statistics Institute showed on Wednesday.
"The risk of deflation is significant, but we don't think it will occur. We will see negative figures for a few months but inflation will pick up at the end of the year," said Citigroup analyst Jose Luis Martinez.
Consumer price inflation has been falling rapidly across the 16-member euro zone on lower oil prices and recession, with Ireland and Portugal also showing annual declines in March.
Analysts say Spain faces a higher risk of deflation than most euro zone economies, as the global crisis coincides with a construction sector collapse to create the country's worst recession since its 1936-1939 civil war.
"We see a clear risk of deflation, not just in Spain but the whole of the euro zone," said BNP economist Luigi Speranza.
The Spanish government on Wednesday ruled out deflation, defined as a prolonged period of generalized price declines.
Economy Secretary David Vegara expected a return to inflation late this year on oil price base effects. He saw the economy starting to level out after months of sharp decline.
"There are some elements that are beginning to indicate a stabilisation of the data," Vegara said, when asked if he saw cause for optimism of economic recovery.
2-YEAR DEFLATION RISK
The Bank of Spain sees negative inflation as a blessing, so long as it does not turn into a deflationary spiral in which consumers put off purchases on expectations of lower prices.
Spanish inflation has outpaced the European average for the past 15 years due to a costly service sector and indexation of collective wage deals to consumer prices.
Some economists say Spain must cut costs by up to 20 percent if it is to build competitive, economic alternatives to troubled construction and real estate sectors that formerly drove nearly a third of growth -- more than twice the euro zone average.
What worries analysts like Speranza is a rapid fall in Spanish underlying or core inflation, which discounts volatile energy and food components.
Spain's core inflation fell to a rate of 1.3 percent in March from 1.6 percent in February and 3.1 percent in April of last year.
While headline consumer prices may rise again in 2010, due to oil and food price base effects, wider core prices will enter deflation, says Speranza.
"We have in our central scenario a relatively long period of negative core inflation in Spain starting from mid next year, and lasting for a couple of years," he said. (Reporting by Andrew Hay; Editing by Toby Chopra)