German Producer Price Inflation May 2008

German producer-price inflation, which is widely considered to be an early indicator of price pressures in the economy, accelerated to the fastest pace in almost two years in May on energy costs. Factory gate prices increased 6 percent from a year earlier, the fastest rate since July 2006, the Federal Statistics Office in Wiesbaden said today.




Energy prices rose 15 percent from a year earlier and oil products were 25.9 percent more expensive, the statistics office said. Excluding energy, producer prices rose 2.9 percent. Oil prices have doubled in the past year and reached a record $139.89 a barrel on June 16. German inflation accelerated to 3.1 percent in May and consumer prices in Europe gained an annual 3.7 percent, the most in 16 years.

If we look at the comparative consumer and producer price indexes in the chart below, we can see that this is the second wave of increases in producer prices in recent years. The first wave which ended in mid 2006 pushed consumer prices up from a 1% to a 2% increase range. This wave has started from a higher lever and we have moved from a 2% to a 3% range. But we should note that as the rate of producer price increases dropped back after the summer of 2006 the rate of consumer price increases did not accompany it. This is what the ECB wants to avoid happening this time - consumer inflation getting "stuck" around 3%, and that is why they may well raise interest rates at the next meeting in July, despite the fact that the eurozone economies are now generally wilting under the summer heat of the high exchange rate, the credit crunch, and the high cost of energy.