European Factory Prices Rose 9% in July on Oil Record

By Fergal O'Brien

Sept. 2 (Bloomberg) -- European producer prices increased the most in at least 18 years in July as crude oil reached a record before easing last month.

The 9 percent increase from a year earlier in the 15 euro countries was the biggest since the series began in 1990 and followed an 8 percent gain in June, the European Union statistics office in Luxembourg said today. Core prices, which exclude energy, accelerated to 4.3 percent from 4 percent.

Crude oil, which reached a record $147.27 a barrel on July 11, has fallen almost 28 percent since then to a five-month low, easing inflation pressures. Still, the European Central Bank will probably keep interest rates at a seven-year high this week even after the economy contracted in second quarter as it seeks to prevent a wage-price spiral.

``The core measure has also shown some signs of pass- through as it has climbed up over the last twelve months,'' said Carsten Brzeski, an economist at ING Group in Brussels. While retailers may find it hard to pass on price increases as consumer demand weakens, ``today's numbers are new evidence that it is far too early for the ECB to give the all-clear on the inflation front.''

Interest Rates

The ECB raised the benchmark interest rate to 4.25 percent in July on concerns that consumer-price gains at twice the bank's 2 percent limit will become embedded in the economy even as growth cools. While it left rates unchanged last month, policy makers Axel Weber and Lucas Papademos last week said the ECB remains focused on inflation risks and may need to lift rates again if they intensify.

All but one of 53 economists surveyed by Bloomberg News predict the bank will leave the benchmark rate at 4.25 percent on Sept. 4 and only five expect a cut this year.

Annual energy-price inflation accelerated to 29.4 percent in July from 27.6 percent in June, today's report showed. Crude oil fell as low as $105.46 a barrel today, the lowest since April 4, and was at $108.39 as of 12:15 p.m. in London.

``The data reflect the pressure from oil we saw until last month, but this may be the peak,'' said Aurelio Maccario, chief euro area economist at Unicredit MIB in Milan. After Hurricane Gustav passed the U.S. Gulf Coast without causing major damage to offshore platforms, ``it seems the downward trend we've seen in oil has become a little bit more entrenched.''

Economists expected overall producer price inflation of 9.1 percent in July, according to the median of 24 forecasts in a Bloomberg News survey. From a month earlier, producer prices rose 1.1 percent in the euro area in July.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.