German August Producer Prices Rise Less Than Expected

By Simone Meier

Sept. 19 (Bloomberg) -- German producer prices rose less than economists expected in August, evidence that inflation pressures are easing in Europe's largest economy.

Producer prices rose 8.1 percent from a year earlier after increasing 8.9 percent in July, which was the fastest pace since October 1981, the Federal Statistics Office in Wiesbaden said today. Economists forecast prices to rise 8.3 percent, according to the median of 28 estimates in a Bloomberg News survey.

The cost of crude oil is retreating from a July record just as the economy is cooling, leaving companies with less room to pass on higher costs. German inflation slowed for a first month in four in August. Still, the European Central Bank this month kept its benchmark rate at 4.25 percent, signaling it's more concerned about faster inflation than slowing growth.

``Energy has become significantly cheaper, easing tensions,'' said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. ``We still expect the ECB to wait a while before cutting interest rates.''

The euro rose as high as $1.4237 after the release from $1.4206. The single currency traded at $1.4221 at 8:29 a.m. in Frankfurt, bringing gains against the dollar to 1.9 percent over the past year.

In the month, producer prices declined 0.6 percent, today's report showed. Energy prices rose 22 percent from a year earlier, while declining 2.5 percent in the month. Excluding energy costs, prices gained 3.5 percent from August 2007.

All-Time High

While crude oil prices have dropped by about a third from an all-time high of $147.27 a barrel on July 11, they are still up approximately 20 percent from a year earlier.

The German association representing chemical companies including BASF AG and Bayer AG on Sept. 17 cut its 2008 sales forecast, citing rising raw-material and energy costs. Growth ``will flatten out'' within the industry, Ulrich Lehner, who heads the group, said in a statement.

Continental AG, the German tire maker that's being taken over by Schaeffler Group, said on Sept. 13 that it won't meet its profit goals for fiscal 2008. Rising raw-material prices and weaker demand in Europe and the U.S. curbed third-quarter sales.

In the economy of the 15 nations that share the euro, inflation slowed to 3.8 percent in August from 4 percent in the previous month. That's still above the German inflation rate of 3.3 percent and the central bank's 2 percent limit.

Second-Round Effects

The ECB is concerned about so-called second-round effects emerging as labor unions push through more pay and companies raise prices to compensate for higher costs. ECB Vice President Lucas Papademos said on Sept. 11 there are ``indications'' of ``broad-based'' second-round effects materializing.

``The risk that a prolonged period of high inflation may destabilize expectations and become entrenched in wage and price setting requires a resolute stance in monetary policy,'' ECB council member Mario Draghi said on Sept. 16. ``It is essential that other economic actors too adopt a responsible behavior.''

In Germany, the IG Metall labor union representing 3.2 million workers said earlier this month that it will seek as much as 8 percent more pay in this year's wage round. That would be the biggest increase in at least 16 years.

Leverkusen-based Lanxess AG, Germany's largest publicly traded specialty chemicals maker, said on Sept. 17 that it will meet its full-year profit goals as it continues to pass on higher raw-material costs to its customers.

Still, with the economy showing few signs of recovery after shrinking in the second quarter, companies may find it more difficult to raise prices and wages. German manufacturing contracted in August and exports declined more than economists forecast in July.

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