german producer prices fwiw

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German Producer Prices Increase on Oil, Raw Materials (Update2)
July 19 (Bloomberg) -- Producer price inflation in Germany, Europe's largest economy, was faster than expected last month as the cost of energy and raw materials increased.

Goods from plastics to newsprint were 6.1 percent more expensive in June than a year earlier, the Federal Statistics Office in Wiesbaden said in a statement today. Economists expected a gain of 5.9 percent, according to the median of 35 forecasts in a Bloomberg News survey. From May, prices rose 0.3 percent.

A 21 percent increase in the price of oil this year has boosted companies' costs, increasing concern at the European Central Bank that they may feed through to consumer prices and lead workers to demand higher wages. The bank has signaled it may raise rates as soon as next month.

``Firms are now finding it easier to pass on the increases in their input costs,'' said Ken Wattret, chief euro-zone market economist at BNP Paribas in London. ``The implications for ECB policy are pretty obvious. It has to raise rates.''

Energy prices rose an average of 17.8 percent from a year earlier, the statistics office said. The cost of oil products gained 10.5 percent with heating oil 10.9 percent more expensive than in June 2005. Electricity prices rose 15 percent and natural gas was 28.2 percent more expensive, according to the statement.

German chemical companies, including BASF AG and Bayer AG, raised prices by 3 percent between January and June to counter rising energy costs, the VCI industry association said July 5.

Adding to Pressure

The ECB warned last week in its monthly report that ``price increases at the earlier stages of the production chain will add to the pressure on prices towards the latter stages, in particular consumer prices.''

ECB council member Nout Wellink said June 26 that ``the risk that you find the increase in oil prices in producer prices and later on in consumer prices is increasing.''

ECB President Jean-Claude Trichet said July 6 that policy makers will show ``strong vigilance'' against inflation, which rose 2.5 percent in June. Inflation has exceeded the ECB's limit of just below 2 percent every month since February 2006.

Raising Rates

Central banks around the world are tightening monetary policy to stem inflation. The Bank of Japan on July 14 raised its benchmark overnight rate between banks for the first time in almost six years. The U.S. Federal Reserve has raised rates 17 times in succession and further tightening in the euro region would take the ECB's key rate to the highest level since 2002.

Producer prices in the U.S. jumped in June on energy prices, the Labor Department in Washington said yesterday. German producer price inflation accelerated to 6.2 percent in May, the fastest rate in almost 24 years.

Oil, which rose to a record $78.40 per barrel on July 14, cost $73.95 in electronic trading on the New York Mercantile Exchange at 8:42 a.m. in Frankfurt. Excluding energy, producer prices rose 0.1 percent on the month and 2.4 percent on the year, the statistics office said.

Retailers' profit margins are being squeezed by oil prices above $70 a barrel. An index measuring prices paid for goods intended for resale rose to 62.5, the highest since October 2002, from 61.2 in May, the Bloomberg Retail PMI showed July 6.

Retailers may use an increase in German sales tax next year to raise prices as soon as this autumn, according to Carsten Klude, an economist for MM Warburg. ``This would relieve some of the pressure on their margins,'' he said.

Tax Increase

Chancellor Angela Merkel's coalition government is raising value-added tax to 19 percent from 16 percent, that's the most in nearly four decades. That prompted the Organization for Economic Cooperation and Development on May 23 to reduce its 2007 growth forecast for Germany to 1.6 percent from 1.7 percent.

German investor confidence dropped the most in almost four years in July, the ZEW Centre for European Economic Research said yesterday. Investors are fretting that high oil prices and tax increases will crimp the outlook for growth next year.

These views were echoed by the HWWA economic institute, one of six advising the government, which also said yesterday that the VAT increase will slow the recovery in consumer spending.

Investors are betting that the ECB will raise its benchmark interest rate up to 3.5 percent by the end of the year, futures trading shows. The yield on the contract for December settlement was at 3.60 percent this morning.

The contracts settle to the three-month euro area inter-bank offered rate for the euro which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.



To contact the reporter on this story:
Gabi Thesing in Frankfurt at [email protected]