Wednesday, May 28, 2008

German May Inflation Accelerates More Than Forecast

Inflation in Germany, Europe's largest economy, accelerated more than economists forecast in May as the cost of oil surged.

Consumer prices rose 3 percent from a year earlier after increasing 2.6 percent in April, when measured using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. Economists expected inflation to quicken to 2.9 percent, according to the median of 25 forecasts in a Bloomberg News survey. In the month, prices increased 0.6 percent.

A jump in crude-oil prices to a record $135.09 a barrel on May 22 is pushing up inflation in Germany and across the economy of the 15 euro nations, hurting consumers' purchasing power. The European Central Bank this month left its key interest rate at a six-year high of 4 percent to counter inflation pressures.

"Oil prices are really holding inflation hostage,'' said Nick Matthews, an economist at Barclays Capital in London. "Stronger German data will probably push this month's euro-area inflation back to March's record level of 3.6 percent. That will stay the ECB's hand.''

Adding to the ECB's inflation concerns, German import prices rose more than economists expected in April, gaining 0.9 percent from March, the statistics office said today. Economists forecast a 0.7 percent increase.

The price of heating oil rose as much as 13.3 percent and diesel was up to 8.7 percent more expensive in May from a month earlier, the statistics office said.

ECB's Limit

German inflation has exceeded the ECB's limit of just under 2 percent for more than a year as the euro's appreciation fails to offset higher oil and food costs. Germany's ECB council member, Axel Weber, has said the bank may need to raise interest rates to contain inflation.

The ECB shelved a planned increase in September after the U.S. housing slump caused money and credit markets to seize up.

Investors have increased bets that faster inflation will force the ECB to raise its key lending rate. EONIA swap contracts, a widely used market gauge of interest-rate expectations, rose as high as 4.25 percent yesterday from 3.99 percent two weeks ago.

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