Despite the EU’s perceived monetary hawkishness, German producer price inflation (PPI) has accelerated to a 13-month high.
German January Producer-Price Inflation Accelerates (Update3)
By Christian Vits
Feb. 20 (Bloomberg) — German producer prices rose at the fastest annual pace in 13 months in January, underlining European Central Bank concern that inflation is accelerating.
Prices for goods from newsprint to plastics jumped 3.3 percent from the same month a year earlier, compared with 2.5 percent in December, the Federal Statistics Office in Wiesbaden said today. Economists expected a 2.8 percent gain, the median of 29 estimates in a Bloomberg News survey shows. From a month ago, prices rose 0.8 percent.
“Energy prices are clearly the main driver of inflation,” said Peter Meister, an economist and bond analyst at BHF Bank in Frankfurt. “While inflation should moderate in the coming months we don’t expect the rate to fall into the ECB’s comfort zone before year-end.”
European government bonds fell as the report fueled speculation the central bank won’t cut interest rates. The ECB is concerned workers’ demands for higher pay to compensate for rising prices will provoke an inflation spiral. IG Metall, Germany’s biggest labor union, today won a 5.2 percent wage increase.
“The pricing power of firms, notably in market segments with low competition, could be stronger than expected,” ECB President Jean-Claude Trichet said Feb. 7.
The ECB left its benchmark interest rate at 4 percent this month as it weighs the risk of slowing growth against accelerating inflation.
The yield on the German 10-year bund, Europe’s benchmark, rose 5 basis point to 4.04 percent by 11.15 a.m. Frankfurt time. Yields move inversely to bond prices.
The price of oil has surged 71 percent in the last 12 months, reaching a record $100.10 a barrel yesterday in trading on the New York Mercantile Exchange and pushing German inflation to 3 percent last month.
Oil products gained 18.7 percent from a year earlier, the cost of gasoline was up 11.8 percent, today’s report showed, heavy heating oil surged 47 percent. Producer prices excluding energy rose 2.5 percent from January 2007.
Lanxess AG, the German maker of chemicals used by the leather and automotive industries, will seek further price increases to counter higher raw-material costs. “It’s our company policy to pass this on in a timely manner,” Chief Executive Officer Axel Heitmann said last month.
German consumer confidence held near a two-year low in February as inflation reduced households’ spending power.
“Worries about longer-term inflation risks, which prompted the ECB Governing Council to gradually reduce the degree of monetary expansion, still persist,” the Bundesbank said in its monthly bulletin this week. “Stability risks” relate “in particular to strong upward inflation pressures.”
At the same time, the euro’s 9 percent gain against the dollar in the past six months is blunting some of the impact of rising prices by making imports cheaper.
Slowing economic growth may also dampen inflation risks. The German government has cut its forecast for economic growth this year to 1.7 percent from an October estimate of 2 percent, citing the effects of a stronger euro and record oil costs.
By way of comparison, according to the Cleveland Fed, US PPI for December stands at 6.8 percent.