German Inflation Slows Less Than Expected on Energy

By Christian Vits

Sept. 26 (Bloomberg) -- Inflation in Germany, Europe's largest economy, slowed less than economists forecast in September as a midyear spike in oil worked through to consumer prices.

Prices rose 3 percent from a year earlier using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. Economists expected the inflation rate to fall to 2.9 percent from 3.3 percent, according to the median of 15 forecasts in a Bloomberg News survey. From August, prices fell 0.1 percent.

While the cost of oil has receded from a record $147.27 a barrel in July, its are still up 30 percent over the past year, reducing consumers' and companies' spending power. The European Central Bank kept its benchmark rate at a seven-year high of 4.25 percent this month and ECB President Jean-Claude Trichet said on Sept. 11 that inflation is the main worry of European citizens.

``German inflation is currently more persistent than we had thought as energy prices work through into consumer prices,'' said Andreas Rees, chief German economist at UniCredit Markets & Investment Banking in Munich. ``The ECB will remain more focused on inflation than on slowing economic growth.''

Under a national measure, the inflation rate declined to 2.9 percent from 3.1 percent in August and fell 0.1 percent from the previous month.

ECB Concerns

The ECB is concerned companies will raise prices to pass on higher raw-material costs and unions will push through bigger raises to compensate workers for the increased cost of living. With inflation breaching the ECB's 2 percent limit for the past year, the central bank's room for maneuver is limited even as growth weakens. ECB council member Axel Weber said this week that weaker growth won't ``magic away'' inflation.

Import-price inflation in Germany, which accounts for about a third of the euro-region economy, held at the fastest pace in almost eight years in August led by higher energy costs, the Federal Statistics Office in Wiesbaden said today. Excluding energy, import prices rose 4.1 percent in the year.

The ECB raised its inflation projections this month to around 3.5 percent for 2008 and 2.6 percent for 2009. At the same time, ECB staff lowered their growth forecasts for this year and next to about 1.4 percent and 1.2 percent, respectively.

ECB Vice President Lucas Papademos said in an interview with Italy's Il Sole 24 Ore published today that there are ``clear indications'' of faster wage increases and that the bank ``cannot exclude renewed increases'' in oil and commodity prices. ``The outlook for inflation over the medium term will fundamentally depend on future unit-labor cost growth.''

Wage Demands

Germany's IG Metall labor union, representing 3.2 million workers, is seeking the biggest pay increase in 16 years for staff at companies such as ThyssenKrupp AG and Siemens AG. The union, Germany's biggest, wants wages to rise 8 percent next year, Chairman Berthold Huber said this week.

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 more than expected to the lowest level in more than three years in September as the worsening financial crisis in the U.S. damped the outlook for global economic growth. The world's biggest financial companies have posted more than $520 billion in writedowns and credit losses after the subprime mortgage market collapsed.

``The time has come to lower interest rates,'' Gernot Nerb, an economist at Ifo institute which conducts the business confidence survey, said last week. ``That doesn't have to happen next week, but the signal should soon come that rates will fall in the next few months.''

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net