European Producer Prices Plunge Most in 22 Years

By Fergal O’Brien

Dec. 2 (Bloomberg) -- European producer prices dropped the most in 22 years in October, a sign that inflation will slow further and give the European Central Bank leeway to extend its interest-rate cuts to tackle the recession.

Factory prices fell 0.8 percent from September, the biggest decline since October 1986, the European Union statistics office in Luxembourg said today. The drop was due to a slump in oil prices and reduced the annual producer-price inflation rate to 6.3 percent from 7.9 percent.

Slowing inflation is giving the ECB scope to cut interest rates as policy makers across the globe seek to limit the economic damage from the global financial crisis. Consumer-price inflation has already eased to the lowest in more than a year and the ECB will probably cut its key rate by half a percentage point this week, a survey of economists shows. That would be the third time reduction since early October.

This “adds to the now substantial evidence that inflationary pressures in the euro-zone are retreating sharply,” said Howard Archer, chief European economist at IHS Global Insight in London. “There is a compelling case for the ECB to slash interest rates by 100 basis points” this week.

Economists forecast that producer prices would fall 0.3 percent in October from the previous month, based on the median of 27 estimates in a Bloomberg News survey. They also predicted that the annual rate would ease to 7 percent.

Oil Prices Drop

Energy prices dropped 4 percent from September, today’s report showed. Crude oil has declined about two-thirds to below $50 a barrel since reaching a record $147.27 in July. The surge in oil costs this year pushed producer-price inflation to 9.2 percent in July, the highest level since the data series began in 1990.

ECB council member Axel Weber said last week that the central bank has plenty of room to lower rates as inflation and economic growth slow.

Data last week showed that the euro area’s inflation rate fell by the most in almost two decades in November, dropping to 2.1 percent from 3.2 percent. The ECB aims to keep inflation close to, but below, 2 percent.

“Diminishing inflation pressure has given the ECB ample room to move and it will use it, given the rapidly deteriorating economic outlook,” Weber said on Nov. 26.

The ECB’s governing council holds its next policy meeting in Brussels in two days. A half-point cut at the meeting would reduce its benchmark rate to 2.75 percent. Nineteen of the 56 economists in the Bloomberg survey see the bank cutting the rate by at least 75 basis points. The ECB has never cut its key rate by more than 50 basis points since it was founded in 1999 and Archer and Jacques Cailloux at Royal Bank of Scotland Plc say it may not break from that pattern this week.

“The economic conditions and the risks about the outlook warrant a larger cut from the ECB than 50 or 75 basis points,” Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc, said in a Bloomberg Television interview in London. “They may want to save ammunition for the future, though we wonder why that is the case.”

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