Producer prices see biggest surge in 27 yrs

German prices at the factory gate, an early indicator of inflation, rose at their fastest rate in 27 years in July, data showed Tuesday in another worrying sign for Europe's biggest economy.

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Producer prices were 8.9 percent higher than in July last year, the statistics office said, more than the 7.5 percent rise expected by economists surveyed by Dow Jones Newswires and topping a 6.7 percent jump seen in June.

The main culprit was higher energy prices, soaring 24.5 percent compared to last July and costing 5.1 percent more than in June alone. Stripping these out, producer prices inched up just 3.6 percent.

The German economy contracted 0.5 percent in the second quarter compared to the first three months of the year, data showed last week, while euro-zone output as a whole fell by 0.2 percent. But as Tuesday's data for Germany show, inflation remains strong, meaning the European Central Bank with its strict mandate to keep a lid on price rises is not in a position to spur activity by cutting interest rates.

But Andreas Rees at UniCredit said that the rise in German producer prices, the biggest since October 1981, could be "the last hurrah of inflation."

"Nosediving oil and food prices make more friendly inflation figures in the months to come a certainty," Rees said in a research note.