Rising German prices point to record euro inflation

Boosted by surging oil costs, prices in four German states rose by between 0.4 and 0.6% month-on-month, official data showed. This outstripped the 0.3% price increase that economists had forecast for Germany as a whole this month. Data from the German states provided some of the first insights into trends in the 15-nation euro zone, where inflation accelerated to a record 3.3% in February -- far above the European Central Bank’s target of just below 2%. In a speech to be delivered in Luxembourg on Friday, ECB Governing Council Member Axel Weber said price pressures in the euro zone were “alarmingly high” and he saw upside risks to price stability in the region over the mid-term. Separate data on Friday showed consumer price inflation in Belgium, the first euro zone country to report its national figure, hit its highest annual rate since 1985.

Karsten Junius, an economist at DekaBank in Frankfurt, said the German state data suggested annual inflation in Germany would be higher in 2008 than last year -- despite the fact prices were boosted by a three point rise in sales tax in 2007. “For the euro zone, we are looking at a record inflation rate for March,” Junius said. “In this climate, the ECB should not send out any signals for an interest rate cut.” The ECB has kept its main lending rate at 4.0% even as monetary policymakers in the United States and Britain have cut borrowing costs to try and restore calm to rattled markets.

 
WORRY FOR CONSUMERS

Commerzbank Matthias Rubisch said rising inflationary pressure “is poison for a recovery in consumption ... That will hit purchasing power.” Private consumption accounts for nearly 60% of the German economy and the government hopes household spending will help compensate for slower growth in foreign demand this year. Official data show consumer spending has yet to improve markedly, although wage growth has shown signs of accelerating -- which may in turn fuel further inflationary pressure.

Weber, who is also president of the Bundesbank, said emerging economic risks would push the German central bank to make "cutbacks" to its forecast for workday-adjusted economic growth of 1.6% this year. Data for the German states showed annual inflation accelerated by between 0.2 and 0.4 percentage points.

A Reuters poll forecast the EU inflation measure (HICP) for Germany would tick up by a tenth of a point to 3.0% in March. A preliminary poll forecast euro area inflation would hold steady at 3.3% this month. A flash estimate of euro zone inflation is due on Monday.

Germany, Europe’s biggest economy, accounts for nearly a third of the euro zone price index. Two further German states are due to report their price data later on Friday, after which a preliminary national inflation estimate will follow. (Reuters)