Energy Costs Pressure EU's Producer Prices

Soaring energy costs pushed euro-zone producer prices to a high in July, likely increasing the European Central Bank's concern about inflation ahead of its upcoming rate-setting meeting. Prices of goods leaving factory gates rose 9% from a year earlier, after rising 8% in June, European Union statistics agency Eurostat said. It was the fastest annual gain since records began in Jan. 1990 and was largely driven by energy costs, which added 24.5% in July from a year earlier. Producer prices rose 1.1% in July after climbing 1% in June. The inflation pressures mean the ECB will likely keep its key rate near 7-year high at 4.25% at its meeting despite sharply slowing economic growth. ECB staff forecasts are likely to show slower growth and higher inflation this year and next, underscoring the ECB's dilemma. The ECB aims to anchor euro-zone inflation at just below 2% but faced an extended period where the rate of consumer-price rises has been well above that target. An economist at ING Bank said it is far too early for the ECB to give the all-clear on the inflation front. Euro-zone manufacturers have been able to pass on higher food and, particularly, higher energy costs. However, with plummeting consumer confidence and very sluggish retail sales, euro-zone retailers will not be able to pass higher producer prices on to consumers. Rather, they will have to squeeze their margins. The Org. for Economic Cooperation & Development recently downgraded its expectations of euro-zone growth this year to 1.3%, from 1.7% in June. But, echoing ECB policy-maker concerns, the Paris-based organization stressed that slower growth is unlikely to damp euro-zone inflation quickly. The central bank frets producers will try to pass on higher costs they are facing to consumers, prompting consumers to push for higher wages and creating a wage-price spiral in which inflation becomes uncontrollable. Most economists expect the ECB will keep its key rate on hold through year end.