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German producer-price inflation rate fell on oil

German producer-price inflation, an early indicator of price pressures in an economy, decelerated to the slowest pace in two years in January after energy costs declined.

Prices for goods from newsprint to plastics rose 3.2% from a year earlier, down from 4.4% in December, the Federal Statistics Office in Wiesbaden said today. That's the lowest rate since December 2004. Economists expected a rate of 3.3%, according to the median of 29 forecasts in a Bloomberg News survey. Inflation in the 13-nation euro region has held below the European Central Bank's limit for five straight months after the price of oil fell 25% from a July record. The bank has nevertheless signaled it will raise borrowing costs next month for a seventh time since late 2005 on concern that stronger economic growth will reignite inflation. „Inflation as it stands is not a worry for the ECB,” said Andreas Rees, chief Germany economist at HVB-Unicredit in Munich. „But looking further ahead, the ECB definitely sees a medley of inflation risks looming, particularly the German wage round.” German trade unions are demanding higher pay after the economy, Europe's largest, expanded at the fastest pace in six years in 2006. IG Metall, Germany's biggest union, said February 6 it would seek 6.5% more pay for its members, defying calls for wage moderation from the ECB.

Rees said if IG Metall wins increases of around 4%, this could feed into producer prices later this year. „Obviously not all of it could be passed on, but some companies will definitely try, leading to price pressures,” Rees said. German producer-price inflation, which peaked at 6.2% in May, slowed through the remainder of 2006. While prices rose 5.5% on average last year, the biggest increase since 1982, the price of oil and other raw materials have dropped in recent months on concern a slowdown in the US will hurt demand. The cost of crude oil in January was 14% lower than a year earlier and a barrel cost $58.75 today compared with its July record of $78.40. The price of oil-related products dropped 5.1% in January from a year earlier, the statistics office said, with light heating oil 9.9% cheaper in the month and 13.5% cheaper in the year. Electricity was 3.2% more expensive than a year ago and gas prices rose 9.7%. Excluding all energy costs, producer prices rose 2.9% in the year. Still, after the drop in the cost of oil products, gas prices are likely to fall too, the statistics office said.

The inflation rate in the euro area was 1.9% in January, unchanged from December, keeping it below the ECB's ceiling 2% for a fifth straight month. The Frankfurt-based bank defines price stability as inflation „close to but below 2%.” The ECB has taken its key rate to 3.5% from a six-decade low of 2% in six steps since December 2005 and has signaled that it will raise borrowing costs further next month as faster economic growth increases the risk of inflation. Governing council members Lorenzo Bini Smaghi and Vitor Constancio said last week they are concerned about stronger growth fueling wage demands. „The outlook for price stability remains subject to upside risks” including „stronger than currently expected wage developments,” Bini Smaghi said February 14. The next day Constancio described the outcome of salary talks as among the „most immediate risks” to inflation. The European Commission last week raised its forecast for economic growth in the 13 euro nations this year to 2.4%, up from its 2.1% forecast in November. Investors expect the ECB will raise rates again after March, futures trading suggests. The implied rate on the three-month Euribor futures contract for September was at 4.16% today. 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 benchmark rate since the currency's start in 1999. (Bloomberg)