Thursday, August 16, 2007

German Inflation Holds Above ECB Limit a Fifth Month in July 2007

From Bloomberg today:

German Inflation Holds Above ECB Limit a Fifth Month

The rate of inflation in Germany, Europe's largest economy, held above the European Central Bank's limit for a fifth month in July.

The annual, harmonized inflation rate remained unchanged at 2 percent, matching an initial estimate published July 30, the Federal Statistics Office in Wiesbaden said today. Consumer prices rose 0.5 percent from May, when measured using a harmonized European Union method, the office said.

The ECB has raised interest rates eight times since the end of 2005 to combat price risks, and signaled a ninth increase is likely in September. The bank aims to keep inflation in the 13- nation euro region just below 2 percent, a goal it hasn't achieved in any year since 1999.

``Inflation rates will rise above 2 percent in September at the latest,'' said Alexander Koch, an economist at UniCredit Markets & Investment Banking in Munich. ``The ECB's rate increase in September is a done deal, but due to the financial market correction the probability of a move in December has declined.''

European banks last week acknowledged their vulnerability to rising defaults on U.S. subprime mortgages and credit-market turmoil led the ECB and other central banks to provide emergency money-market financing to limit it. Global stocks fell 10 percent in the past month on concern spread about the effect of defaults in U.S. home loans to people with poor credit history.

A rebound in oil prices since mid-January may drive up inflation as economic growth gives companies room to pass on higher costs. Oil traded at $72.73 a barrel today, up from $50.48 on Jan. 18 and close to its record of $78.40 a barrel set in July last year.

Energy Prices

German fuel prices gained 1.2 percent in July from the previous month and heating oil prices advanced 3.6 percent, the statistics office said. Package tour prices rose 16.3 percent. Compared with a year earlier, food prices gained 1.9 percent while margarine prices rose 4.2 percent.

German import prices, an early indicator of inflation pressures, increased more than economists expected in June, led by rising oil and metal costs. Import prices gained 0.6 percent from May, when they gained 0.3 percent.

Still, the euro's 4.5 percent gain against the dollar over the past year is helping to cushion the impact of rising raw material costs by making imported goods more affordable. The single currency traded at $1.3422 today.

While euro-region inflation has held below 2 percent for 11 straight months, the ECB expects it to accelerate later this year. The bank on June 6 forecast inflation would average 2 percent this year and next.

ECB President Jean-Claude Trichet on Aug. 2 signaled the central bank will lift its benchmark rate by a quarter-point to 4.25 percent next month. Financial market turmoil since then has prompted investors to pare bets on the ECB lifting its key rate again after September, futures trading shows.

The implied rate on the three-month Euribor contract for December settlement dropped to 4.34 percent today from 4.52 percent on Aug. 8. The contracts settle to the three-month inter- bank offered rate for the euro, which has averaged 16 basis points more than the ECB's key rate since the currency's start in 1999.

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