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German Inflation Accelerated in February on Oil Costs (Update1)

German Inflation Accelerated in February on Oil Costs

March 11 (Bloomberg) -- Inflation in Germany, Europe's largest economy, accelerated in February as prices for vegetables and heating oil increased amid freezing weather.

The annual rate of consumer price increases rose to 1.8 percent from 1.6 percent in January, the Federal Statistics Office in Wiesbaden said today, confirming a Feb. 25 estimate. From a month earlier, prices gained 0.4 percent.

Record oil prices are boosting inflation and weighing on consumer spending as the German economy struggles to recover from a fourth-quarter contraction. With unemployment at the highest since World War II making it harder for retailers to raise prices, any acceleration in inflation may be temporary.

``We will see moderate wage increases this year so the price pressure from oil is relatively low,'' said Klaus Schruefer, an economist at SEB AG in Frankfurt. ``The room for companies to raise prices is very tight. Germany is a buyer's market.''

The cost of crude has surged 31 percent this year, taking it to a record $54.30 per barrel on March 9. From a year earlier, heating oil prices rose 31 percent in February, according to the statistics office. Freezing weather conditions also pushed vegetable prices 8 percent higher compared January.

Bundesbank President Axel Weber said last month that oil prices may lead to ``some swings'' in euro-region inflation, though there are ``currently no clear signs'' of inflation pressure.

Rising Unemployment

With unemployment rising, companies including Siemens AG and DaimlerChrysler AG have persuaded German workers to cut wage expectations in return for job guarantees. The DGB union federation, which represents 7.4 million workers, says German wages rose an average of about 2 percent last year, below the 2.1 percent increase in consumer prices across the euro region.

Germany's economy skirted recession in the second half of last year as higher energy costs and the euro's appreciation against the dollar damped global growth and exports.

The European Central Bank expects inflation to slow below its 2 percent limit this year as retailers struggle to raise prices and workers fret about their jobs. The ECB said last week prices will increase about 1.9 percent in 2005, compared with a projection of around 2 percent made in December.

Investors are reining in expectations for ECB interest rates increases this year, futures trading suggests. The rate on the December Euribor interest-rate future contract was 2.47 percent at 12:54 p.m. in Frankfurt, compared with 2.62 percent at the start of the year.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's launch in 1999. The Euribor three-month money market rate was 2.13 percent today.

The German inflation rate was 1.8 percent in February when calculated using European Union methods, the statistics office said, higher than last month's estimate of 1.7 percent. From a month earlier, prices rose 0.4 percent using EU methods, compared with the original estimate of 0.3 percent.


LINK: http://www.bloomberg.com/apps/news?pid=10000100&refer=germany&sid=a9evHBnfnKzk