German inflation harmonised to European Union standards (HICP) rose unexpectedly this month, suggesting inflationary pressure in the euro zone is still much higher than the European Central Bank would like.
Annual German HICP advanced in July by a tenth of a percentage point to 2.1 percent, preliminary data from the Federal Statistics Office showed on Tuesday. Prices rose by 0.5 percent on the month.
"This data suggests annual eurozone inflation will stay at 2.5 percent in July," said DZ Bank economist Bernd Weidensteiner. "And it's fair to assume inflation will be well above the ECB's target rate for the foreseeable future." Oil prices rose to record highs close to $80 per barrel earlier this month, spurred on by conflict in the Middle East.
That, and signs that the eurozone economy gathered speed in the second quarter, has helped to cement expectations that the ECB will seek to counter the risk of inflation by raising its main lending rate to 3 percent on August 3. EU statistics office Eurostat is due to publish a flash estimate of July eurozone inflation at 0900 GMT on July 31.
In contrast to the HICP figures, Germany's national index of consumer prices (CPI) showed the annual rate of inflation easing by a tenth of a point to 1.9 percent. Month-on-month, German CPI rose by 0.4 percent, the Office said. The German data were based on consumer price figures from six states, which sent out somewhat conflicting signals.
Annual inflation in North Rhine-Westphalia (NRW) and Hesse, which together account for nearly a third of German CPI, rose by 0.1 percentage point compared with June. But in Bavaria, the annual rate slowed by 0.1 percentage point, mirroring developments in Brandenburg. Saxony's annual rate eased by 0.2 percentage points. A sixth state, Baden-Wuerttemberg, showed the annual rate holding steady.
Figures from six German states offer the first insights into how prices across the eurozone are developing.
Europe's largest economy accounts for around 30 percent of the price index in the bloc, where annual inflation held at 2.5 percent in June, well above the ECB's target rate of just below two percent. The consensus forecast of economists polled by Reuters last week was for CPI and Germany's EU-harmonised gauge of consumer prices (HICP) to increase by 0.4 percent from June.
The same analysts said they expected annual CPI to ease by one tenth of a point to 1.9 percent with annual HICP inflation holding steady at 2.0 percent. A breakdown of the states' data showed the cost of package holidays and oil boosted prices in July. In contrast, seasonal foods were significantly cheaper than in June.
Aided by base effects, German import price inflation eased to 5.6 percent in June, the lowest level since March, separate data from the Office showed earlier on Tuesday.
However, DZ Bank's Weidensteiner said that with the German government planning to raise value added tax (VAT) by three percentage points in 2007, fresh inflationary pressure could be on the horizon as firms anticipate having to raise their prices. "We could start to see firms getting ready for the VAT hike by making price adjustments during the fourth quarter," he said.