German June Producer Prices Increase Most in 26 Years

By Bernd Bergmann

July 18 (Bloomberg) -- German producer prices rose at the fastest pace in 26 years in June, adding to pressure on the European Central Bank to keep interest rates high even as economic growth slows.

Prices for goods from newsprint to plastics increased 6.7 percent from a year earlier, the most since March 1982, after rising an annual 6 percent in May, the Federal Statistics Office in Wiesbaden said today. Economists expected a 6.5 percent gain, the median of 25 estimates in a Bloomberg News survey shows.

As record oil makes production more expensive, companies are under pressure to pass on higher costs to consumers. The European Central Bank this month raised its benchmark interest rate by a quarter point to 4.25 percent to try to prevent faster inflation from becoming entrenched in the 15-nation euro region.

``This rise in producer prices is not surprising,'' said Matthias Rubisch, an economist at Commerzbank AG in Frankfurt. ``Inflation will remain very high until the end of the year. It may even increase, which is why we expect another interest rate rise by the ECB, possibly in September.''

Oil has risen more than 70 percent over the past year and reached a record of $147.27 a barrel on July 11. Inflation in Germany accelerated to 3.4 percent in June, the fastest pace in 12 years, and consumer prices in Europe gained an annual 4 percent, the most since 1992.

Energy Jump

German energy prices rose 17.9 percent from a year earlier and prices for mineral oil products were 28 percent higher, the statistics office said. Excluding energy, producer prices rose 3 percent. From May, including energy, prices rose 0.9 percent.

BASF SE, the German chemicals maker, last month raised prices for paper and cardboard chemicals by as much as 20 percent because of higher raw-material, energy and freight costs.

``Our message is that we should avoid second-round effects,'' ECB President Jean-Claude Trichet said in an interview with four European newspapers published on the ECB's Web site today. ``Price setters and social partners must take into account that we will be back to price stability -- in line with our definition -- say over 18 months,''

Rising prices are boosting wage demands and pushing up expectations for inflation in the future. Expectations, as measured by the so-called breakeven on five-year French inflation- indexed bonds, were at 2.4 percent yesterday, up from 2.1 percent in March. They fell from a record 2.83 percent after the ECB raised rates on July 3.

Whatever's Necessary

The ECB ``will continue to take any action necessary to ensure the firm anchoring of inflation expectations,'' Greece's ECB council member, George Provopoulos, said this week.

The ECB, which aims to keep inflation just below 2 percent, predicts it will average about 3.4 percent this year and 2.4 percent in 2009.

Higher prices are eroding purchasing power and curbing growth in an economy already burdened by a stronger euro and the U.S. slowdown. German investor confidence plunged to a record low this month, the ZEW Center for European Economic Research said July 15.

Germany's Finance Ministry predicts economic growth will slow to 1.7 percent this year and 1.2 percent next. Germany accounts for about a third of the euro-region economy.

``Facing record oil prices, higher borrowing costs and a grossly overvalued currency, the euro-zone economy has exhausted its resilience'' said Holger Schmieding, chief European economist at Bank of America in London. ``Although oil-driven headline inflation is still heading up,'' the ``no longer negligible risk of a recession will probably prevent any further ECB rate hike.''

To contact the reporter on this story: Bernd Bergmann in Frankfurt at bbergmann1@bloomberg.net