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UPDATE 1-Euro zone PPI points to rising inflationary pressure

Published 01/05/2011, 06:28 AM
Updated 01/05/2011, 06:32 AM

* Energy costs push euro zone producer prices up 0.3 percent

* Industrial orders jump 1.4 pct from September to October

(Recasts with economists' comments)

By Jan Strupczewski

BRUSSELS, Jan 5 (Reuters) - A surge in energy costs drove up euro zone producer prices in November, pointing to rising inflationary pressures as a rebound in industrial new orders showed the recovery in manufacturing gaining traction last year.

The European Union's statistics office Eurostat said prices at factory gates in the 16 countries using the euro in November were 0.3 percent higher than in October and 4.5 percent higher year-on-year.

Economists polled by Reuters had expected the monthly increase and had pencilled in a 4.4 percent annual rise.

"Pipeline price pressures are clearly on the rise, and this extends beyond food and energy," said Martin van Vliet, economist at ING bank.

A separate more forward-looking purchasing managers survey on Wednesday showed growth in the euro zone services sector slowed in December as activity in Ireland and Spain shrank, highlighting the two-speed nature of the region's recovery.

That, like the beginnings of a pick up in producers' prices, points to tensions in policymaking for the whole region which may become more problematic for the European Central Bank later in the year.

The growth of producer prices, which translate into consumer price increases unless absorbed by intermediaries and retailers, was driven mainly by a 0.9 percent monthly increase and a 8.8 percent annual jump in the costs of energy.

Van Vliet said that excluding the more volatile prices of food and energy, producer prices rose 4.1 percent year-on-year.

"However, we strongly doubt whether the pick-up in core producer prices signals an imminent pick-up in core consumer goods inflation. We suspect that given the still-fragile consumer demand backdrop, higher producer prices will be passed on only partly to consumer prices," he said.

RATES NOT AN ISSUE YET

Consumer inflation jumped to 2.2 percent in December, an early estimate showed on Tuesday, the highest rate in more than two years and above the European Central Bank's target of below, but close to 2 percent.

"It is far too early to talk about second round effects and severe risks to price stability, but all indicators on the ECB monetary policymaking compass are pointing northward," said ING economist Carsten Brzeski.

"Rate hikes will not be an issue now but it will not make ECB policymaking easier. If it wasn't for the sovereign debt crisis, a hike could be justifed soon," Brzeski said.

Most recent Reuters polling shows economists believe the ECB may keep rates on hold at 1.0 percent until at least the fourth quarter of this year, with some having pushed back forecasts for a first rise into 2012.

Separately, Eurostat said industrial new orders in the euro zone in October rebounded from a September slump and rose 1.4 percent month-on-month for a 14.8 percent year-on-year gain.

The monthly rise in orders was mainly thanks to a 5 percent jump in demand for durable consumer goods.

Excluding volatile orders for ships, planes and trains, orders rose 0.9 percent on the month for a 14.4 percent annual gain.

"The indications are that the industrial sector will have made a decent contribution to euro zone GDP growth in the fourth quarter," said Howard Archer, economist at IHS Global Insight.

Economists expect that euro zone growth may have slowed to around 0.2-0.3 percent quarter-on-quarter in the last three months of 2010 from 0.4 percent in the third quarter.

(Reporting by Jan Strupczewski, editing by Charlie Dunmore and Patrick Graham)

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