European Producer Prices Unexpectedly Decline on Year
European producer prices unexpectedly fell from a year earlier for the first time since 2004 in January, indicating inflation will slow more and adding to the case for further action by the European Central Bank.
Factory-gate prices in the euro region declined 0.5 percent from January 2008, after a 1.2 percent increase in December, the European Union’s statistics office in Luxembourg said today. Economists forecast a 0.5 percent gain, according to the median of 27 estimates in a Bloomberg survey. From the previous month, prices fell 0.8 percent after a 1.5 percent drop in December.
Oil prices have fallen by two-thirds since a July peak and consumer-price inflation is near a 10-year low, prompting global deflation concerns and putting pressure on the ECB to announce new measures to combat the worst global recession since World War II. The central bank, which expects inflation to average just 0.4 percent this year, already has cut its key rate by more than half since early October to a record low of 1.5 percent.
Weakening producer prices are a “good heads up” that underlying inflation also will ease for consumers, said Luigi Speranza, an economist at BNP Paribas in London. “It’s not just energy; both in Germany and France we’ve seen weakness in core components.”
Producer-price inflation in Germany, Europe’s largest economy, slowed for a fourth month in January, and German manufacturing orders dropped 8 percent from the previous month, four times as much as economists expected and extending their worst decline on record, data showed yesterday.
‘Greater Chance’
“Given the collapse in German factory orders, you got to think there is a greater chance that manufacturers are scrambling to cut prices in order to try and find some demand somewhere,” said Colin Ellis, European economist at Daiwa Securities SMBC Europe Ltd. “That could presage a more-protracted period of falling prices.”
ECB President Jean-Claude Trichet said March 5 the risks of deflation in the euro region were “very, very meager,” while ECB council member Axel Weber said the bank would only need to take additional measures if it saw “significant deflation risks,” which he didn’t at the moment quick payday loans.
Speranza at BNP Paribas said the ECB may be underestimating the probability of deflation. “I think there is a risk and I think it’s bigger than they assume,” he said.
The euro remained lower following the producer-price data. The European currency traded at $1.2782 against the dollar at 10:35 a.m. in London, down 0.4 percent.
Further Weakness
Data this week pointed to further weakness in the euro region. European investor confidence dropped to the lowest in at least six years this month, research institute Sentix said on March 9. Irish Prime Minister Brian Cowen said yesterday that his nation’s economy may shrink as much as 6.5 percent this year.
Manufacturers are cutting jobs to rein in losses. Hanover, Germany-based Continental AG, Europe’s second-largest car-parts maker, on Feb. 19 reported its first quarterly loss in seven years. Munich-based MAN AG, Europe’s third-biggest truck maker, is extending reductions in employees’ work hours after fourth- quarter profit plunged by almost half.
Energy prices at the producer level fell 2.7 percent from a year earlier, after rising 0.1 percent in December, according to today’s report. From the previous month, energy prices fell 1.5 percent. The core rate of inflation, which excludes energy and construction, slowed to an annual 0.1 percent.
10-Year Low
Consumer-price inflation held near a 10-year low in February, data showed on March 2. While declining energy prices leave consumers with more to spend, rising unemployment and waning confidence in the economic outlook probably curbed shopping and hurt retail sales in January, according to a Bloomberg survey of economists. That report is due tomorrow.
Carrefour SA, Europe’s largest retailer, today said it will step up price cuts to help revive sales growth and cope with “challenging” business conditions. The Paris-based company has been hit by a drop in consumer confidence in France — its biggest market — to near a record low in December, forcing it to step up price cuts.
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