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German Producer Prices Post Biggest Drop in 10 Months

20/06/2003 12:10
German producer prices had their biggest drop in 10 months in May as energy costs fell, adding to concerns that deflation threatens Europe's largest economy.

The price of goods ranging from chemicals to gasoline fell 0.3 percent from April and rose 1.3 percent in the year, the Federal Statistics Office said in Wiesbaden, Germany. Economists had expected a monthly decline of 0.2 percent.

General Motors Corp.'s German unit, Adam Opel AG, and Thomas Cook AG, Europe's second-biggest travel company, are among companies lowering prices as Germany heads for recession. Germany's inflation rate fell to a 3 1/2 year-low of 0.7 percent in May, below the 1 percent European Central Bank Chief Economist Otmar Issing describes as the ``danger zone'' for deflation.

``What I am concerned about is that once prices are down, you can't raise them anymore,'' Pfeiffer Vaccuum AG Chief Executive Officer Wolfgang Dondorf said in an interview. ``There are bargain hunters everywhere.''

Pfeiffer Vaccuum, whose customers included Applied Materials Inc., last year lifted prices by 3 percent to 4 percent. This year, the maker of pumps for semiconductors and television tubes, based in Asslar, Germany, is offering discounts for large orders.

Fuel Costs

The euro's 21 percent gain against the dollar in the past year may lead to deflation, London-based ratings company Fitch Ratings said Tuesday. The ECB on June 5 pared interest rates to 2 percent, the lowest since at least 1948 in any of the 12 euro nations, as the region's inflation rate fell below its 2 percent limit.

Fuel prices fell 4.2 percent in May from April, and the cost of light heating oil dropped 7.9 percent. Excluding oil products, producer prices gained 1.6 percent in the year, the statistics office said. Taking out all energy costs, such as electricity and gas, prices rose just 0.6 percent from the previous year.

In Switzerland, where the economy is in recession, producer and import prices fell for a third month this year, the statistics office in Neuchatel said. The Swiss producer and import price index fell 0.2 percent in May from April and declined 0.5 percent from the previous year.

The threat of deflation will prompt the U.S. Federal Reserve to lower its benchmark rate at next week's meeting of policy makers, investors and economists predict. All 22 bond-trading firms that deal directly with the Fed expect a cut of at least 25 basis points. The target lending rate stands at 1.25 percent.

No Growth

Economists define deflation as a general price drop in an economy that fails to grow or create jobs. Germany is near its second recession in as many years as the $2.3 trillion economy shrank in the first quarter after stalling at the end of 2002 and unemployment rose in 13 of the past 14 months.

``The big risk is that the economy isn't growing at all,'' said Christoph Hausen, an economist at Gothaer Asset Management AG in Frankfurt, which manages the equivalent of $19 billion. ``Today's report points to a further drop in the inflation rate.''

Opel, based outside Frankfurt, is giving European customers incentives equivalent to a price cut of about 1 percent. Thomas Cook AG, Europe's No. 2 travel company, has lowered the average cost of its vacation bookings in the first half of the year to 618 euros ($723) from 638 euros the previous year.

The euro's increase against the dollar in past year has also slashed import prices and hurt profitability at exporters including Volkswagen AG, Europe's largest carmaker. The single currency bought $1.1686 at 10:19 a.m. in Frankfurt.

Shoppers Hold Back

The Bundesbank, which adjusts its German producer price figures for seasonal swings, said prices rose at an annualized rate of 2.5 percent in the six months through May, less than the 3.1 percent annualized gain in the six months through April.

Foreign companies are also feeling the pinch in Germany. Hennes & Mauritz AB, Europe's largest clothing retailer, on Wednesday said profit rose at the slowest pace in two years, partly because of faltering demand in Germany, where the company makes almost a third of its revenue.

The HDE retail industry association has said it expects sales to fall this year, even after Saturday shopping hours were extended earlier this month to 8 p.m. from 4 p.m.

ECB's Issing has said the central bank doesn't see any signs of deflation in the euro region ``for the foreseeable future.'' He also said this week that the ECB is ``not blind in one eye'' and would act ``in a timely and decisive manner'' if needed.

The ECB last month said it aims to keep inflation close to 2 percent, rather than between zero and 2 percent, to make sure it can battle deflation as vigorously as inflation. The region's inflation rate dropped to 1.9 percent in May from 2.1 percent in the previous month.

Italian Inflation

Italy's inflation rate held at 2.7 percent for the fourth straight month in June, with consumer prices rising 0.1 percent from May, a survey of economists showed. Italy is the first country in the 15-member European Union to release June data. Germany's states start publishing CPI figures from Monday.

The inflation rate in Italy, Europe's fourth-largest economy, has exceeded the European Central Bank's 2 percent ceiling for the past three years. The build-up to the war in Iraq, driving up energy costs at the start of the year, offset price declines in other industries such as telecommunications.