Producer prices in the euro area rose sharply in April driven by an acceleration in energy prices. Still, deflation is the greater concern than a rise in inflation.
Producer price inflation rose to 2.8% in April from 0.9% in March, data released by Eurostat showed Wednesday. That was slightly above economists' forecasts for a 2.6% gain. The latest increase was the strongest since November 2008.
On a month-on-month basis, the producer price index (PPI)climbed 0.9% in April, faster than 0.6% in March. Economists had expected a 0.7% rise.
Manufacturers' pricing power is constrained by the substantial spare capacity in the sector, Howard Archer at IHS Global Insight noted. Furthermore, the economist said muted consumer spending across the Eurozone indicates that the increase in producer prices will be largely absorbed by retailers.
According to the flash estimate released by the Eurostat on May 31, Eurozone consumer price inflation edged up to 1.6% in May from 1.5% in April. The latest inflation figure remains within the the European Central Bank's target to keep inflation below, but close to 2% over the medium term. The bank is set to announce the its interest rate decision on June 10.
With wage growth likely to slow sharply in response to the labor market downturn and the huge amount of spare capacity in the economy likely to push down on firms' margins, Capital Economics' Ben May expects CPI inflation to slow over the remainder of the year. Although, the sharp rise in producer price inflation is likely to prompt concerns of inflationary pressure, the economist assessed that deflation, rather than a surge in inflation is the greater threat for the region.
In the whole of the European Union, producer prices gained 1% in April compared to March, taking the annual growth to 3.7% in April. In March, the PPI moved up 0.8% month-on-month and 1.7% annually.
Among the member states, the strongest annual increases in producer prices was recorded in Malta, Greece, the U.K. and Denmark. The only decreases were registered in Latvia and Slovakia.
Annually, prices in total industry excluding the energy sector gained 1%. Prices in the energy sector rose 7.7% and those in the intermediate goods segment by 2.7%. Durable consumer goods prices moved up 0.4%, while those of capital goods fell 0.1%. Non-durable consumer goods also recorded a 0.4% fall.
The ECB is likely to keep interest rates down at 1.00% not only through 2010 but deep into 2011, said IHS Global Insight's Archer. Inflation continues to be pushed up primarily by higher energy prices while underlying price pressures still appear muted.
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