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Energy boosts euro zone factory prices in May

BRUSSELS - Soaring energy costs pushed euro zone producer prices up in May more than expected, data showed on Wednesday, reinforcing speculation the European Central Bank may rise interest rates more than once this year.

Prices at factory gates in the 15 countries using the euro rose 1.2 percent month-on-month for a 7.1 percent annual gain, European Union statistics office Eurostat said.

Economists polled by Reuters had expected a 0.9 percent monthly increase and a 6.7 percent yearly rise.

Eurostat also revised up by 0.1 percentage point the April producer price growth data to 0.9 percent month-on-month and 6.2 percent year-on-year.

Factory prices were driven in May mainly by the cost of energy, which surged 4.1 percent on the month and 18.2 percent annually. Oil rose on Wednesday to within sight of Monday's record high above $143.

‘This confirms that price pressure is mounting in the pipeline, but much of this pressure still seems to be coming from oil. So it is the same old story, just worse,’ said Holger Schmieding, co-head of Europe Economics at Bank of America.

Core producer price inflation, a measure excluding the volatile energy and construction components, came to 0.3 percent month-on-month and 3.8 percent annually -- against 0.4 percent and 3.7 percent, respectively, in April.

Producer prices are an early indication of inflationary pressure because their increases, unless absorbed by retailers via lower profit margins, eventually translate into higher costs for consumers.

The ECB is widely expected to raise its main interest rate to 4.25 percent from 4.0 percent after euro zone inflation hit a record 4.0 percent year-on-year in June, double the bank's target.

‘We believe the European Central Bank is going to hike rates tomorrow and there is a significant chance of another hike after this one, given that inflation is going to keep on increasing,’ said Sunil Kapadia, economist at UBS.

The ECB wants to limit the impact of growing energy and food costs on prices in the wider economy, trying to prevent a wage-price spiral.

Eurostat data showed only small increases in prices of durable and non-durable consumer goods. But the cost of intermediate goods, which include commodities, grew quickly -- by 0.5 percent month-on-month and 4.3 in annual terms.