Business life: My finance news blog

German producer-price inflation accelerated to the fastest pace since October 1981 last month, bolstering the European Central Bank's case to keep interest rates at a seven-year high even as the economy cools.

Prices for goods from newsprint to plastics increased 8.9 percent from a year earlier after rising 6.7 percent in June, the Federal Statistics Office in Wiesbaden said today. Economists expected a 7.5 percent gain, the median of 30 estimates in a Bloomberg News survey shows. In the month, prices rose 2 percent.

Higher energy prices make production more expensive, putting companies under pressure to pass on rising costs to customers. Even though the price of oil has retreated 21 percent from a July 11 record, the ECB kept its benchmark rate at 4.25 percent this month, saying it is worried that past commodity-price increases will push up wage demands and lead to entrenched inflation.

“This should be the peak in producer-price inflation, but it's too early for the ECB to sound the all clear,'' said Nick Matthews, an economist at Barclays Capital in London. “The bank is still concerned about the pass-through of previous price increases and will stay on hold for the foreseeable future.''

Oil has risen more than 60 percent over the past year and reached a record of $147.27 a barrel on July 11. Inflation in Germany accelerated to 3.5 percent in July, the fastest pace in 12 years, and consumer prices in Europe gained an annual 4 percent, the most since 1992.

Energy Jump

German energy prices gained 25 percent from a year earlier and prices for electricity increased 23 percent, today's report showed. The cost of diesel fuel rose 30 percent from July 2007 payday advance $500 payday loan. Excluding energy, producer prices rose 3.6 percent in the year.

BASF SE, the world's biggest chemical producer, on July 31 reported profit that beat analyst estimates for a sixth straight quarter after passing on higher costs. The company has raised prices by as much as 20 percent.

ECB President Jean-Claude Trichet said on Aug. 3 that “a pipeline effect'' from commodity-price increases “is something which is ongoing and undoubtedly creates more risks.'' There is an “absolute necessity to avoid the materialization of such risks.''

Rising prices are leading to higher wage demands and the pushing up the outlook for prices. Inflation expectations, as measured by the so-called breakeven on 5-year French indexed bonds, were at 2.2 percent yesterday, up from 2.1 percent in March. They fell from a record 2.83 percent after the ECB raised rates on July 3.

Higher prices are eroding purchasing power and curbing growth in an economy already burdened by a stronger euro and the U.S. slowdown. Germany, which accounts for about one third of the euro- area economy, contracted 0.5 percent in the second quarter, while gross domestic product in the 15 euro nations fell 0.2 percent.

The Bundesbank said yesterday economic activity may remain muted for “some time yet,'' with the economy likely to experience a “dry spell'' in the second half of the year. Still, it said it doesn't expect a further deterioration in growth and noted that inflation expectations remain above the ECB's 2 percent price- stability limit.

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