German July Inflation Quickens More Than Initially Estimated

By Gabi Thesing

Aug. 14 (Bloomberg) -- The inflation rate in Germany, Europe's largest economy, rose more than initially estimated in July, led by surging costs for energy and package holidays.

Consumer prices rose 3.5 percent from a year earlier, the Federal Statistics Office said today, revising a flash estimate of 3.4 percent from July 29. That is the fastest pace since Germany first measured inflation under a harmonized European Union method in 1996. From June, prices rose 0.7 percent, more than the initially reported 0.6 percent.

Faster inflation may deepen an economic slowdown by boosting company production costs and eroding the purchasing power of households. The European Central Bank left its benchmark lending rate at a seven-year high last week to prevent a wage-price spiral. Still, the price of oil has fallen 22 percent from a July record, which may damp inflation pressures in the coming months.

``This should probably be the peak for German inflation, depending on how the price of oil develops,'' said Juergen Michels, an economist at Citigroup Inc. in London, the only economist out of 25 in a Bloomberg News survey to forecast the revision. ``At the same time, the ECB will remain on inflation alert over wages.''

Policy makers remain concerned that the fastest euro-area inflation rate in 16 years will prompt companies to pass on their costs and encourage trade unions to demand bigger wage deals to counter higher oil prices. Crude reached a record $147.27 a barrel on July 11 and at $116.47 today is still 58 percent more expensive than a year ago.

`Strong Concern'

There is ``very strong concern that price and wage-setting behavior could add to inflationary pressures,'' ECB President Jean-Claude Trichet said last week.

German negotiated wages jumped 3.5 percent in the year through April, the biggest gain in 12 years, as companies such as BASF AG and ThyssenKrupp AG bowed to union demands.

This year's wage rounds culminate next month, when IG Metall, Germany's biggest union, starts talks for 3.2 million employees in the electronics, metal and car industries whose collective contracts expire Oct. 31. The union won a 5.2 percent raise for about 85,000 steelworkers in February.

At the same time, the euro area's expansion is weakening. The German economy, which accounts for one-third of the region's gross domestic product, shrank 0.5 percent in the three months through June, data this morning showed. The European Union's statistics office may say later today that the euro-region economy contracted by 0.2 percent in the second quarter from the first, according to a survey of 40 economists by Bloomberg.

While growth is weakening, the ECB has ``only one needle'' in its compass, Trichet said last week. ``That needle is price stability.''

From June, German consumer prices calculated under a national measure increased 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 1.9 percent.

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