German Inflation Slows From Fastest Pace in 12 Years

By Gabi Thesing

Aug. 27 (Bloomberg) -- Inflation in Germany, Europe's largest economy, eased from a 12 year-high in August after oil prices retreated from a record.

Prices rose 3.3 percent from a year earlier using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. Economists expected the pace of inflation to slow to 3.4 percent from 3.5 percent, according to the median of 23 forecasts in a Bloomberg News survey. From the previous month, prices fell 0.4 percent.

A 21 percent decline in the price of oil from a July record has eased pressure on companies to pass on higher costs and left consumers with more money to spend. Still, the European Central Bank kept its benchmark interest rate at 4.25 percent earlier this month and President Jean-Claude Trichet said inflation will moderate ``only gradually'' next year.

``Inflation will have peaked, but for the ECB it is way too early to signal the all clear,'' said Laurent Bilke, an economist at Lehman Brothers International in London. ``The governing council is still concerned about pipeline pressures and wage negotiations.'' Bilke expects the ECB will keep its key rate at a seven-year high until the end of 2008.

ECB Governing Council member Axel Weber told Bloomberg News in an interview published today said the ``inflation outlook hasn't markedly changed in the short term,'' and that ``action'' may be necessary once the economy emerges from its slump.

ECB Rates

The ECB this month kept rates unchanged to fight so-called second-round effects, or consumers and companies seeking compensation for higher costs by pushing up salaries and prices. The Frankfurt-based bank aims to keep inflation just below 2 percent.

ECB Executive Board member Juergen Stark told Sueddeutsche Zeitung in an interview published yesterday that he already sees ``broad-based second-round effects.''

Adding to the ECB's concerns are wage talks in Germany's metal industry that kick off next month. IG Metall, the country's largest trade union whose pay deals affect 3.2 million workers, wants more than the 6.5 percent increase it demanded last year.

Crude oil prices are still up 57 percent from a year earlier, sapping the spending power of consumers and companies. The July oil-price spike has pushed German producer prices to a 27-year high and wholesale prices to the highest rate in 26 years, while import prices rose the most in eight years.

`Absolute Necessity'

Trichet said on Aug. 7 that there is an ``absolute necessity to avoid the materialization'' of inflation risks stemming from pipeline pressures.

Still, with the economy cooling, companies may find it more difficult to pass on higher costs. The economies of the euro region and Germany both shrank between March and June and data since then has raised the possibility of a recession.

German business confidence declined to a three-year low in August and Consumer optimism slumped to the lowest level in five years, the Nuremberg-based GfK AG market research company said yesterday.

Under a national measure, the inflation rate declined to 3.1 percent in August from 3.3 percent as consumer prices fell 0.3 percent on the month.

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