Inflation at the Producer Level Heats up in Germany

Producer prices in Germany rose 0.7% in February. Prices of intermediate goods were up 0.56%, those of investment goods fell 0.10% and prices of consumer goods were unchanged. The rise was due almost entirely to continued rising energy costs. As the first chart shows, energy price increases have greatly exceeded those of the index excluding construction and energy since early 2005, widening the gap between the two series

The rise in February was larger than expected and is likely to increase inflation concerns of the European Central Bank (ECB). The ECB has already raised its key interest rate from 2%, which had been in place since June 2003, to 2.25% last December and again in March to 2.5%.

While the ECB focuses on the consumer price index, it is mindful of the potential impact that rising producer prices may have on consumer prices. The second chart shows the course of consumer and producer prices over the past five years.The rise in producer prices over the past year has been bigger and more persistent than previous rises and is, therefore, more likely to have a significant impact on consumer prices.

Even if energy prices should stabilize or decline, these second-round effects of the high energy prices could soon begin to affect consumer prices particularly as the economy continues to show signs of increased activity. Early this month, February new orders, both foreign and domestic were reported to have increased and last week, Manpower reported that German employers intended to increase employment in the first two quarters of this year.