German July Producer Prices Drop Most in 60 Years

By Gabi Thesing and Christian Vits

Aug. 19 (Bloomberg) -- German producer prices fell at the fastest pace in 60 years last month as energy costs declined.

Prices dropped 7.8 percent from a year earlier after falling 4.6 percent in June, the Federal Statistics Office in Wiesbaden said today. That’s the biggest decline since the office started to calculate the series in 1949 and exceeded economists’ forecast for a 6.5 percent drop, according to the median of 21 estimates in a Bloomberg News survey.

The price of crude oil has dropped more than 50 percent from a record in July 2008, while weaker demand is also weighing on inflation. The European Central Bank, which has cut its benchmark interest rate to a record low of 1 percent, has downplayed the threat of deflation in the euro-region economy.

“Producers’ pricing power is declining and one could see the data as a first sign of deflation,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “However, deflation is only dangerous if it lasts and I expect producer prices to return to positive territory by year-end.”

The euro extended its decline against the dollar after the report and was down 0.3 percent at $1.4094 as of 7:42 a.m. in London.

Energy Prices

The price of oil was at $68.91 a barrel today, having reached a record $147.27 in July 2008. Energy prices dropped 16.5 percent in July from a year earlier, according to today’s report. Petroleum prices fell 28.8 percent and heating oil was 49.8 percent cheaper. Prices for electricity declined 10.8 percent.

From the previous month, overall producer prices decreased 1.5 percent in July. Excluding energy costs, prices fell 0.2 percent in the month and were down 3.6 percent from a year ago.

ThyssenKrupp AG, Germany’s largest steelmaker, has curbed output this year and delayed output at a U.S. steel mill after metal prices tumbled.

German consumer prices posted their first annual decline in more than 22 years in July, dropping 0.7 percent. Euro-area consumer prices also fell 0.7 percent last month. ECB President Jean-Claude Trichet has said the drop is due to energy prices and that inflation will “turn positive again later this year.”

Trichet also expects price developments “to remain subdued,” even as the euro-area economy emerges from the recession, he said in Frankfurt on Aug. 6.

Germany’s economy expanded 0.3 percent in the second quarter, a report showed last week, bringing an end to the worst slump since World War II sooner than forecasters had expected.

While rising exports and government programs may keep growth on track, higher unemployment threatens to restrain the recovery, Bundesbank President Axel Weber said in an interview with Sueddeutsche Zeitung published on Aug. 17.

Even so, the German economy “has reached the trough,” Weber said. “The third quarter should also be better than thought.”

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