German Producer-Price Inflation Reaches 27-Year High

By Gabi Thesing

Aug. 19 (Bloomberg) -- German producer-price inflation accelerated to 8.9 percent, the fastest pace since October 1981, reinforcing speculation the European Central Bank will keep interest rates at a seven-year high even as the economy cools.

Economists expected July prices for goods from newsprint to plastics to increase 7.5 percent gain from a year earlier, the median of 30 estimates in a Bloomberg News survey showed. In the month, prices rose 2 percent, the Federal Statistics Office in Wiesbaden said today.

Consumer prices are rising as companies pass on higher energy costs to customers. Even though the price of oil has retreated 21 percent from a July 11 record, the ECB kept its benchmark rate at 4.25 percent this month, saying it is worried that past commodity- price increases will push up wage demands and lead to entrenched inflation.

``There's still a certain pricing pressure in the pipeline,'' said Juergen Michels, an economist at Citigroup Inc. in London. ``The ECB is certainly concerned about inflation, but that doesn't mean that they'll raise interest rates given the deteriorating economic environment.''

The euro dropped as low as $1.4631 after the release from $1.4663. The yield on the 10-year German bund, Europe's benchmark government security, was little changed at 4.13 percent by 7:47 a.m. in London.

Energy Jump


Oil has declined to $112.31 from a record of $147.27 a barrel on July 11. Today's price is 58 percent more than a year ago. Inflation in Germany accelerated to 3.5 percent in July, the fastest pace in 12 years, and consumer prices in Europe gained an annual 4 percent, the most since 1992.

German energy prices gained 25 percent from a year earlier and prices for electricity increased 23 percent, today's report showed. The cost of diesel fuel rose 30 percent from July 2007. Excluding energy, producer prices rose 3.6 percent in the year.

BASF SE, the world's biggest chemical producer, reported profit that beat analyst estimates for a sixth straight quarter on July 31 after passing on higher costs. The company has raised prices by as much as 20 percent.

ECB President Jean-Claude Trichet said on Aug. 7 that ``a pipeline effect'' from commodity-price increases ``is something which is ongoing and undoubtedly creates more risks.'' There is an ``absolute necessity to avoid the materialization of such risks.''

ECB Rates

Rising prices are leading to higher wage demands and the pushing up the outlook for prices. Inflation expectations, as measured by the so-called breakeven on 5-year French indexed bonds, were at 2.2 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.

``This should be the peak in producer-price inflation, but it's too early for the ECB to sound the all clear,'' said Nick Matthews, an economist at Barclays Capital in London. ``The bank is still concerned about the pass-through of previous price increases and will stay on hold for the foreseeable future.''

Higher prices are eroding purchasing power and curbing growth in an economy already burdened by a stronger euro and the U.S. slowdown. Germany, which accounts for about one third of the euro- area economy, contracted 0.5 percent in the second quarter, while gross domestic product in the 15 euro nations fell 0.2 percent.

The ZEW Center for European Economic Research will probably say today that German investor confidence held near a record low in August, increasing the risk of a recession, a survey of economists shows.

The Bundesbank said yesterday economic activity may remain muted for ``some time yet,'' with the economy likely to experience a ``dry spell'' in the second half of the year. Still, it said it doesn't expect a further deterioration in growth and noted that inflation expectations remain above the ECB's 2 percent price- stability limit.

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