Bloomberg News

Five German States Say Inflation Accelerated in October

October 27, 2011

(Updates with Baden-Wuerttemberg from first paragraph.)

Oct. 27 (Bloomberg) -- Inflation in five German states accelerated to the fastest pace in three years in October, led by surging energy costs.

Inflation quickened to 2.8 percent from 2.5 percent in Baden-Wuerttemberg, to 2.7 percent from 2.5 percent in Bavaria, to 2.7 percent from 2.6 percent in Saxony and to 2.4 percent from 2.3 percent in both Brandenburg and Hesse, the states’ statistics offices said today. North Rhine-Westphalia yesterday reported a decline in its inflation rate.

Economists forecast that German inflation, calculated using a harmonized European Union method, will slow to 2.8 percent from 2.9 percent, the median of 22 estimates in a Bloomberg News survey shows. The Federal Statistics Office in Wiesbaden will release that report, based on data from the six states, later today.

Europe’s worsening debt crisis and slowing global growth may crimp demand for oil, the main driver of inflation this year. While euro-region inflation accelerated to 3 percent in September, well above the European Central Bank’s 2 percent ceiling, ECB Governing Council member Ewald Nowotny said on Oct. 25 that the central bank doesn’t see any inflation risks.

“Inflation rates may stay above 2 percent for the rest of the year but then they’ll drop pretty rapidly,” said Christian Schulz, an economist at Joh. Berenberg Gossler & Co. in London. “The weak economy will also damp any price increase potential, so it shouldn’t be a major concern for the ECB.”

The inflation rate in North Rhine-Westphalia decreased to 2.3 percent from 2.8 percent due solely to a one-off drop in education costs, the state’s statistics office said yesterday. In Saxony, consumer prices rose 0.2 percent from September.

‘Significant Risks’

While ECB policy makers have so far resisted pressure to lower interest rates to help an economy battered by the sovereign debt crisis, incoming President Mario Draghi said yesterday there are “significant” downside risks to the economic outlook in the 17-nation euro area.

By contrast, ECB Executive Board member Juergen Stark said the economic slowdown will be temporary and warned that if borrowing costs are left too low for too long they may fuel “new asset-price bubbles.” Stark said the ECB’s key rate at 1.5 percent is “appropriate.”

Companies may struggle to pass on higher costs as the economic slowdown deepens. German business confidence fell to a 16-month low in October and investor confidence plunged to the lowest in three years on concern that company earnings may suffer.

ECB Rates

While Germany’s Bundesbank on Oct. 17 predicted “strong” growth in the third quarter due to a rebound in industrial production and private consumption, it said the outlook has deteriorated. Germany’s recovery came to a near halt in the three months through June.

The ECB will be forced to lower its benchmark rate, which it increased twice this year, by a quarter percentage point to 1.25 percent in December, according to the median forecast in a Bloomberg News survey of 34 economists conducted last month.

--With assistance from Kristian Siedenburg in Vienna and Jeff Black in Frankfurt. Editors: Simone Meier, Matthew Brockett

To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net;

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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