German producer prices boost inflation

AFP - [email protected] • 19 Apr, 2008 Updated Sat 19 Apr 2008 09:49 CEST
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German inflation appeared stuck at a high level on Friday after Europe's biggest economy reported a 4.2 percent jump in producer prices, supporting the case for eurozone interest rates to stay on hold for much of this year.

Prices at the factory gate posted their biggest increase in March since December 2006, and marked a clear rise from the February level of 3.8 percent, the German Federal Statistical Office (Destatis) statistics service said in a statement.

"The inflation picture looks pretty grim," economist Jennifer McKeown said in a research note on rising price pressures for the 15-nation eurozone.

On Thursday, German central bank chief Axel Weber, also a governor of the European Central Bank, warned that increases in food and energy prices appeared to be stronger than forecast in March by ECB staff.

"In June, we will revisit the projections," he said. "Food price increases and energy price increases seem to be much more stubbornly persistent than we've previously anticipated."

On Friday, Weber raised the threat of an ECB rate increase, saying: "Should further price risks or second round effects occur, we need to act with determination."

Second-round effects occur when higher costs for food and fuel lead to wider demands for pay raises and generalised price increases.

If that happens, inflation expectations get built in as people seek wage hikes and put further pressure on prices, creating a vicious circle.

"This is a very unsettling environment for a central bank orientated towards stability," Weber commented in an interview with the German monthly Euro that was released in advance.

German producer prices, which also gained 0.7 percent in March compared with February, "exemplified the risk of stubbornly persistent inflation," Ban of America senior economist Holger Schmeiding told AFP.

"This shows again the pressures driving inflation up" across the eurozone, where the consumer price index hit a record of 3.6 percent in March, he added.

ECB governors have kept the bank's main interest rate on hold at 4.0 percent since June on concerns about growing inflation risk for its 320 million people.

The data "adds of course to the determination at least of the Bundesbank to not even dream about rate cuts," Schmieding told AFP in reference to the German central bank, a conservative or "hawkish" pillar within the ECB governing council.

Energy and food were again leading factors in the German price rise, with oil products showing an annual gain of 20 percent, a figure that spiked to 60 percent for heating fuel. The cost of electricity jumped by 12.4 percent.

At the food counter, producer prices leapt by 26.9 percent for rice and processed cereals, a whopping 42.7 percent for oils and by 23 percent for dairy products.

"Signs that rising energy and food prices are beginning to spill over into the wider economy could keep the ECB in hawkish mood for a few months yet," McKeown said.

The ECB warned Thursday that eurozone inflation was likely "to remain significantly above 2.0 percent in the coming months," a reference to its medium-term target.

Weber said the Bundesbank felt eurozone inflation would come to around 3.0 percent this year, and might even exceed that threshold.

In March, the German consumer price index rose to 3.1 percent from 2.8 percent in the two previous months.

Schmieding suggested that "there would likely be a modest further pass-on from producer prices into consumer prices," but noted that "most of the effect of energy prices is of course, in consumer prices, pretty much immediate."



AFP 2008/04/19 09:49

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