No worries over German inflation 'blip'

ECONOMICS - THE WEEK IN VIEW

Signs of faster German inflation in reports due this week are unlikely to worry investors that Germany's long period of low, stable interest rates is coming to an end.

Due tomorrow are western German inflation figures for May, along with figures for April import prices. Reports published in Bavaria and Baden- Wurttemberg on Friday showed consumer prices in May were driven higher by seasonal items such as package tours and oil costs.

This caused some analysts to revise up their forecasts for the national rate but it is not seen as the start of a faster inflation trend.

"There is very little risk of inflation down the pipeline," said David Brown, an economist at Bear, Stearns International. "Germany's is a gradual, non-inflationary recovery."

Economists predict that uncertainty over government action to chop its budget, including a possible spending freeze, slack consumer demand and 11.3 per cent unemployment will keep price pressures at bay.

Consumer prices in western Germany probably rose 0.2 per cent in May from April and advanced 1.2 per cent from a year ago.

In April, western German inflation slowed to an annual rate of 1.3 per cent, its lowest since July last year. Analysts expect that the nation's inflation rate won't rise above the Bundesbank's long-term target of 2 per cent any time soon.

"We think it is past its low point, but an annual rate of 1.7 to 1.8 per cent would be no problem for us," said Dietmar Braun, a fund manager at DG Bank Luxembourg.

The main threat to German inflation in the next few months will be the impact of the weaker mark feeding through to prices. April producer prices, published last week, rose 0.9 per cent on the year, the highest rise since December 1995. The cost of mining products, iron and steel all rose.

"It was only a matter of time before the currency impacted on producer prices," said Julian Jessop at Nikko Europe. The full effect of imported inflation and higher oil prices will push up producer prices faster in the next few months than in the first quarter of the year, he added.

The worst of the currency decline may be over as the mark's exchange rate stabilised in April. The US dollar rose just 2.3 per cent against the mark in April, having risen as much as 8.2 per cent in the first three months of the year.

This will be felt quickly in import prices. They probably posted their first monthly decline - of 0.1 per cent - in April since August last year. The annual increase in April was probably 2.2 per cent.

Even the Bundesbank, renowned for its close scrutiny of lurking price pressures, has said the inflation environment remains sheltered from the impact of the weaker mark. Council member Olaf Sievert said on Thursday the central bank sees no "dangers for domestic price stability".

The Bundesbank's 17-strong policy council meets to set interest rates on Wednesday, bringing its usual twice-monthly meeting forward by a day because Thursday is a public holiday.

Also due out on Wednesday is a report on Germany's trade balance and current account position for March which will probably show an export surplus of DM8bn. Copyright: IOS & Bloomberg