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German Deflation Fears

German data fuel deflation fears

By Ralph Atkins in Frankfurt

Published: August 19 2009 11:32 | Last updated: August 19 2009 11:32

German producer prices have recorded their largest year-on-year fall since the second world war, highlighting the weakness of inflationary pressures across Europe.

Prices of industrial products were 7.8 per cent lower in July than 12 months earlier, the steepest such fall since records began in 1949, the German federal statistics office reported.

The larger-than-expected drop, which compared with a fall of 4.6 per cent in June, could heighten fears that deflationary forces are building in Europe’s largest economy. Eurozone annual inflation fell in July to minus 0.7 per cent – the lowest record since the launch of the euro in 1999.

So far the European Central Bank has dismissed negative inflation rates as a temporary phenomenon resulting from oil price falls, and it has forecast a return to positive rates by the end of this year.

The latest fall in German producer prices was explained largely by lower energy prices, which were surging during the middle of last year.

Economists said evidence was building that “core” inflation – which excludes volatile energy prices – was also weakening significantly. Pressure on German companies to cut prices has intensified as a result in the collapse in demand for industrial products after the failure of Lehman Brothers investment bank.

Industrial orders, however, have rebounded significantly in recent months. Andreas Rees, economist at Unicredit in Munich, said: “We do not think that this is the start of a deflationary spiral … It is very likely that capacity utilisation will surge in coming months.”