German Producer Prices Drop Most Since 1949 on Oil

By Jana Randow

Dec. 19 (Bloomberg) -- German producer prices dropped the most since records began in 1949 in November as the cost of oil declined and the global economic slowdown curbed demand.

Producer prices fell 1.5 percent from October when they were unchanged, the Federal Statistics Office in Wiesbaden said today. Economists forecast prices would decline of 0.8 percent, according to the median of 27 estimates in a Bloomberg News survey. From a year earlier, prices rose 5.3 percent.

Commodity prices have fallen, eroding demand. At $36 a barrel, the cost of oil has retreated 75 percent from its peak of $147 in July, reducing costs for companies struggling to keep their market share as the global economy contracts and damping price growth. Investors predict that slowing inflation will prompt the European Central Bank to cut interest rates next month.

“The drop is a massive relief for companies and removes pressure on profit margins,” said Joerg Lueschow, an economist at West LB AG in Dusseldorf. “It is highly welcome and gives the ECB room for additional rate cuts. The ECB will lower rates by 50 basis points in January”

The German economy is in its worst recession in 12 years and the Bundesbank expects growth to contract next year. Business confidence dropped to the lowest in more than a quarter of a century in December, the Ifo institute said yesterday.

Lower Inflation

Central banks around the world have lowered borrowing costs to combat a global recession. The ECB has cut its benchmark by 1.75 percentage points since October. The Federal Reserve reduced its main rate to near zero this week and the Bank of Japan cut its benchmark interest rate to 0.1 percent today.

Today’s producer price figures add to evidence that Germany’s inflation rate is declining, giving the ECB additional leeway on monetary policy. German consumer price growth slowed to 1.4 percent under a harmonized European Union method in November from 2.5 percent, falling below the ECB’s price stability threshold for the first time since February 2007.

ECB Executive Board member Juergen Stark warned yesterday that low-rate policies may fuel inflation and create the basis for future crises. “As soon as the current crisis is over, governments and central banks need to change to a restrictive course,” he said.

Policy makers have indicated in recent days that they’re reluctant to lower borrowing costs much further. Still, investors are expecting the bank to cut rates by at least 50 basis points in January, Eonia forward contracts show.

Energy prices fell 3.3 percent in the month and gained 15 percent from a year earlier, today’s report showed. Excluding energy costs, producer prices rose 2.1 percent from November 2007. Petroleum products were 11.5 percent cheaper in the year and 9.8 percent less expensive than in October.

To contact the reporter on this story: Jana Randow in Frankfurt jrandow@bloomberg.net.