Euro zone factory prices up at record pace in June

Prices at factory gates in the 15 countries using the euro rose 0.9 percent month-on-month, the European Union statistics office Eurostat said. The yearly figure, up from 7.1 percent in May, was the highest since measurements started in 1991.

Economists polled by Reuters had expected a 0.8 percent monthly increase and a 7.9 percent yearly rise.

Factory prices were driven in June by the cost of energy, which surged 2.7 percent on the month and 21.4 percent annually.

Oil traded above $126 a barrel on Monday, but was well down on June's records above $140.

Many economists expect inflation to start falling after August unless oil prices rise again.

‘It's still the impact from oil which was pretty strong in June. We can find some comfort in this area that with oil at about $125 a barrel we should gradually see some better figures for PPI in coming months,’ said Gilles Moec, economist at Bank of America.

Core producer price inflation, a measure excluding the volatile energy and construction components, came in at 0.4 percent month-on-month and 4.6 percent annually -- against 0.5 percent and 4.3 percent respectively in May.

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

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The ECB is widely expected to leave borrowing costs unchanged when it meets on Thursday despite a surge in consumer price inflation, following a series of data pointing to a sharp slowdown in the euro zone.

The central bank raised its main interest rate in early July to 4.25 percent from 4.0 percent after inflation reached 4.0 percent year-on-year in June, more than double the ECB target. Price growth accelerated to 4.1 percent in July.

‘The further marked rise in producer prices in June ... will keep speculation bubbling that the ECB could raise interest rates further, although the ECB is certain to keep interest rates unchanged this Thursday,’ Howard Archer, chief economist at Global Insight.

The ECB wants to limit the impact of dearer energy and food on prices in the wider economy to prevent a wage-price spiral. Many economists say slowing growth will dampen price pressures.

A survey showed on Monday investor morale in the euro zone fell in August to its lowest level since July 2003 as inflation concerns and the strong euro weighed on sentiment.

The Sentix group's monthly index of sentiment in the 15-nation euro area, based on a poll of more than 2,800 European investors, fell to -15.3 from -9.3 in July. A Reuters poll of economists had pointed to a reading of -10.0 ECONDE.

Eurostat said prices of intermediate goods, mainly commodities, increased 0.5 percent month-on-month for a 4.8 percent annual gain. Durable consumer goods were flat on the month and grew only 2.3 yearly.