Europe factory costs take a leap

By Brian Swint  |   2008-8-5  |     NEWSPAPER EDITION

EUROPEAN producer prices rose the most in at least 18 years in June on soaring energy costs, sharpening the European Central Bank's dilemma over how to balance faster inflation and slowing economic growth, new figures showed yesterday.

The 8-percent increase from a year ago in factory prices in the 15 nations that use the euro was the biggest since the series began in 1990 and followed a 7.1-percent gain in May, the European Union statistics office in Luxembourg said yesterday.

Economists expected a 7.9-percent increase, according to the median of 27 forecasts in a Bloomberg News survey.

The ECB lifted the benchmark interest rate to a seven-year high last month on concerns that consumer-price inflation at twice the 2-percent limit would become embedded in the economy even as growth slowed. ECB President Jean-Claude Trichet said that the central bank "will do in the future what is appropriate to deliver price stability."

"Manufacturers throughout the euro zone have been able to pass on higher food and energy costs," said Philip Shaw, an economist at Investec Securities in London. "That's being reflected in consumer prices. While there's no case for a rate cut right now, we're similarly cautious about calls for higher rates because of the damage it would do to the economy." Consumer-price inflation accelerated to 4.1 percent last month, the fastest pace in more than 16 years, the statistics office reported last week.

A detailed report on July consumer prices will be released next Thursday.

Producer-price increases in June were led by energy, which jumped 21.4 percent from a year earlier, the biggest gain on record.

Crude oil prices, while down 13 percent from a peak above US$147 a barrel on July 11, were still up more than 60 percent in the past year.

The higher energy prices have been pushing up raw-material costs and putting pressure on companies to pass along the increases to consumers.