that perennial myth, inflation, is rearing its head in Europe (where they don't know about hedonic pricing yet):
Bloomberg News
Wed, 12 Jul 2000, 8:16am EDT
European Economies: German, French Inflation Quickens ( Update1 )
By Hellmuth Tromm and Sonja Dieckhoefer
Paris, July 12 ( Bloomberg ) -- German and French consumer prices rose at a faster pace in June, raising concern the inflation rate in the 11 countries sharing the euro will breach the European Central Bank's 2 percent ceiling for the region.
Germany and France, which account for more than half the euro zone's economy, had held back inflation in the region earlier this year as competition kept companies from pushing prices higher. Signs that businesses are starting to pass higher costs for oil and other raw materials along to consumers makes it more likely the ECB will raise interest rates further, analysts said.
``Euro-region inflation should rise to 2.2 percent in June, well above the European Central Bank's upper limit,'' said Emmanuel Ferry, an economist at Paris brokerage Exane. ``The ECB should respond with a 25 basis point rise to its refinancing rate in September.''
Prices in Germany rose 0.7 percent from May, based on European Union methods, the largest gain since records began in 1997, the Federal Statistics Office said. From a year earlier, prices rose 2 percent. In France, prices rose 0.3 percent in June and 1.9 percent in the year, the largest increase since July 1996.
The inflation rate in the euro region was 1.9 percent in May, just below the ECB's ceiling. Inflation in eight nations, however, was already above the 2 percent level, complicating the ECB's task in setting a common interest rate for 11 countries. Ireland's inflation rate was 5.1 percent in May; Spain's was 3.2 percent.
Growing Concern
Central bank officials have left no doubt that they're concerned about the inflationary impact of resurgent economic growth, higher oil prices and the euro's 18 percent decline against the dollar since the start of 1999. With the economy of the region expected to grow at the fastest pace in a decade this year, some companies are finding it easier to raise prices.
``We're currently very close to exceeding the level of inflation that we judge as tolerable in the medium-term,'' ECB council member Arnout Wellink, head of the Dutch central bank, said Friday. ``Inflation risks continue to be on the upside,'' said ECB Chief Economist Otmar Issing last week.
In the latest evidence of an economic revival in Germany, a government report today showed German exports and imports rose to record levels in May.
The central bank has already raised its main lending rate -- the amount it charges commercial banks for two-week loans -- five times since early November. In late June the central bank switched to a variable rate at its weekly refinancing auctions, with a floor rate of 4.25 percent.
Raising Prices
Interest rate futures contracts, little changed today, already reflect investors expectations for another ECB rate increase in coming months. The September contract for three-month Euribor has an implied yield of 4.83 percent. That's 29 basis points above the current three-month borrowing rate and indicates investors are looking for a quarter-point ECB move before the contract expires in mid-September.
The German unit of Sony Corp., the world's No. 2 maker of consumer electronics, said last month it will raise the prices of goods ranging from TV-sets, Hi-fi systems and DVD players to digital cameras and car radios by as much as 10 percent starting this month, because of the weak euro.
German import prices rose at the fastest pace in almost a decade in May, while prices charged by factories climbed at the quickest pace in more than a year.
``Passing on higher oil costs to our customers is crucial to meeting our growth expectations,'' said Hubertus Stark, spokesman for Fuchs Petrolub AG, a German maker of industrial lubricants. Higher oil costs have forced the company to push up prices on almost all its products.
Degussa-Huels AG, Germany's biggest specialty chemicals maker, said today that it will raise its European price for rubber blacks, used in making tires, starting Sept. 1. The company cited ``a combination of the weak euro and crude oil prices that are beyond comparison.''
Electricity, Phones
While oil has been the main spur to inflation in recent months, consumer prices in June were also boosted by higher travel costs in both Germany and France, the reports showed.
In Germany, the cost of leisure and entertainment goods and services rose 1.4 percent in June and climbed 1.6 percent in the year, the statistics office said.
Inflation would probably be running at a faster rate in Germany if not for increased competition in industries such as telecommunications, electricity and retailing.
German consumers paid 4.8 percent less for telephone calls in June than a year earlier, federal statisticians reported last month. Under pressure from more than 80 rivals at home, Deutsche Telekom AG, Europe's biggest phone company, wants to make acquisitions in Europe and overseas to boost earnings.
Germany's E.ON AG, the country's biggest utility formed through Veba AG's 14 billion euro purchase of smaller rival Viag AG, is spending millions of deutsche marks on ads to attract new customers. Consumers are paying about 13 percent less for their electricity bills since the German market was deregulated at the start of last year.
Retailers in Germany face increasing competition, following Wal-Mart Stores Inc.'s entry into the market in 1997, when it bought the Wertkauf chain. It acquired stores from Spar Handels-AG a year later. The U.S. company cut prices on many products, forcing rivals to follow suit.
Nonetheless, retail sales rose at the fastest pace in almost five years in April, helped along by a recovery in the Europe's largest economy. The German government expects the economy to grow as much as 3 percent this year, up from 1.5 percent in 1999.
The euro region as a whole could soon ``take over the role of the world's growth engine'' from the U.S., German Finance Minister Hans Eichel said over the weekend. |
