European Producer-Price Inflation Eases to 3-Year Low

Oct 2, 2007 - European producer-price inflation eased in August to the lowest rate in more than three years, reflecting a drop in energy costs.

Factory-gate prices in the euro region rose 1.7 percent from the year-earlier month, down from a 1.8 percent increase in July, the European Union's statistics office in Luxembourg said today. That is the lowest reading since April 2004. Unemployment in the 13 nations that use the euro remained at a record low in August, according to a separate report.

The easing in inflation may be temporary after prices for commodities including oil and wheat reached records last month. While the European Central Bank in September stepped back from a planned interest-rate increase after turmoil in the credit markets pushed up borrowing costs, policy makers have so far refused to shift their focus from fighting inflation.

"Excluding energy and food, there are some signs of pipeline pressures for core inflation," said Luigi Speranza, an economist at BNP Paribas in London. "We see a very moderate upturn in prices, nothing to threaten the price stability."

The producer-price inflation rate for August was lower than the 1.8 percent median forecast of 27 economists surveyed by Bloomberg News. Prices rose 0.1 percent in the month, compared with a 0.3 percent increase in July.

Inflation pressure may be curbed as the pace of euro-area economic growth eases, according to BNP, which forecasts that the ECB will leave its benchmark interest rate at 4 percent through 2008.

Unemployment

Unemployment in the 13-nation euro area remained at 6.9 percent in August, the lowest since the data series began in 1993. The rate is down from 7.8 percent a year earlier.

Energy prices at the producer level fell 0.7 percent in August from the previous month and were down 2.2 percent from a year earlier, according to today's report.

Oil prices have jumped 31 percent since the beginning of the year and reached a record $83.90 a barrel on Sept. 20. Wheat prices have almost doubled this year, touching a record $9.6175 last week.

ECB policy makers, who hold their next meeting in Vienna Oct. 4, remain concerned about inflation, which they aim to keep at or below 2 percent. Consumer-price growth in the euro area accelerated last month to a 13-month high of 2.1 percent.

"The monetary-policy stance is still on the accommodative side," ECB Vice President Lucas Papademos said on Sept. 28. "At the same time, given the increase in uncertainty surrounding the economic outlook, it is prudent and appropriate to wait and gather additional information before drawing any firm conclusions for monetary policy."