German July Inflation Remains at Highest in 12 Years

By Simone Meier

July 29 (Bloomberg) -- The inflation rate in Germany, Europe's largest economy, held at a 12-year high in July, led by surging costs for energy and package holidays.

Consumer prices rose 3.4 percent from a year earlier, the Federal Statistics Office said today. That matches the median expectation in a Bloomberg News survey of 23 economists' forecasts and is fastest pace since Germany started calculating inflation using a harmonized European Union method in 1996.

Faster inflation may deepen an economic slowdown by eroding the purchasing power of companies and households. German consumer confidence is already at the lowest in more than five years. Still, European Central Bank council member Klaus Liebscher said he sees room to raise borrowing costs further.

``The pipeline pressures for consumer prices remain high in the short term,'' said Alexander Koch, an economist at UniCredit Markets & Investment Banking in Munich in an e-mailed note. ``Assuming no further big moves in commodity prices, we expect the headline rate to move down only slightly in coming months.''

From June, harmonized consumer prices rose 0.6 percent. Under a national measure, prices rose 3.3 percent in the year and 0.6 percent from the previous month. Core inflation, which excludes heating oil and fuel costs, was at 2.2 percent.

Prices of package holidays increased 14 percent in the month and holiday apartments were 27 percent more expensive. Food prices increased around 0.3 percent from June.

ECB Rates

In the euro region, inflation probably accelerated to 4.1 percent on July 3, more than double the ECB's 2 percent limit, a Bloomberg survey shows. The European Union's statistics office in Luxembourg will release an initial estimate on July 31.

The ECB raised its key rate by 25 basis points to 4.25 percent on July 3 to fight so-called second-round effects, or consumers and companies seeking compensation for higher costs by pushing up salaries and prices. Liebscher said in an interview on July 24 he's ``very much concerned'' about inflation rates.

Borrowing costs are at ``a good level for the moment,'' said Liebscher, who is also head of Austria's central bank. ``We don't know what will happen next month or in two months' time. We haven't exhausted our room for maneuver.''

The ECB said last month it expects inflation to average about 3.4 percent this year and 2.4 percent in 2009. Euro-region growth may weaken to 1.5 percent next year from 1.8 percent.

Rising Wages

In Germany, the Ver.di labor union is staging strikes for a second day to seek 9.8 percent more pay for some 52,000 ground workers and flight crew at Deutsche Lufthansa AG. The Cologne, Germany-based carrier offered 6.7 percent more pay in two steps.

German negotiated wages rose 3.5 percent in the year through April 2008, exceeding inflation averaging 2.4 percent over that period, the statistics office said in a separate statement today. That's the biggest gain in 12 years.

Germany's unemployment rate probably held at 7.8 percent in July when adjusted for seasonal swings, a Bloomberg survey shows. That's the lowest since August 1992.

``High wage growth entails the risk that core inflation will pick up in the months ahead,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt, in an e-mailed note today. ``Particularly since it is easier to pass on higher input costs to consumers in a high-inflation environment.''

`Near A Peak'

With the economy cooling, companies may struggle to pass on higher costs. German business confidence fell more than economists expected in July. European manufacturing and service industries shrank this month.

Crude oil prices have declined 14 percent from a July 11 record of $147.27 a barrel, helping ease price pressures. European money-supply growth, which the ECB uses as a gauge of future inflation, slowed for a second month in June.

``With oil prices falling, the likelihood that German inflation is at or near a peak has risen,'' said Gareth Claase, an economist at Royal Bank of Scotland Group Plc in London in an e- mailed note. Still, ``our forecast remains for inflation to end the year only just under 3 percent.''

The statistics office is scheduled to release final inflation figures for July on Aug. 14.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net.