(Adds economist comments)
GOTHENBURG, Sweden, Oct 2 (Reuters) - Prices at factory gates in the 16-country euro zone rose as expected in August against July on the back of higher oil costs, but they fell in annual terms, data showed on Friday.
Industrial producer prices rose 0.4 percent month-on-month after a revised 0.7 percent fall in July, the Luxembourg-based European Union statistics office said. They fell 7.5 percent year-on-year, following July's revised 8.4 percent drop. [ID:nBRQ007548]
Economists polled by Reuters had on average expected the monthly increase but had forecast the annual decline to be slightly larger, at 7.6 percent.
"Producers' pricing power remains weak amid substantial excess capacity and intense competition, even though manufacturing activity has firmed recently," said Howard Archer, an economist at IHS Global Insight.
More expensive oil served as the main reason behind the monthly rise as energy costs gained 1.5 percent against July, although they were 16.9 percent lower than in August 2008.
While the rise in oil prices from their lows earlier this year will put upward pressure on producer prices in coming months, this is likely to be countered largely by the effects of substantial spare capacity and muted demand, Archer said.
"Ongoing muted core producer prices reinforce belief that underlying inflationary pressures are still very low in the euro zone," he said.
Producer prices are important to the European Central Bank because they show inflationary pressure, or the reverse, early in the pipeline.
The ECB aims to keep annual consumer price inflation just below 2 percent but it was at -0.3 percent in September, the fourth straight month of falling prices.
Economists expect the bank to keep its main interest rate unchanged at the current record low of 1 percent until the third quarter of next year. (Reporting by Jan Strupczewski; Editing by Dale Hudson)