German Producer Prices Show Sharpest Drop of 2012

THE TAKEAWAY: German producer prices drop 0.4% in June, more than expected -> Lower prices support ECB policy -> Euro trading steady

German producer prices for raw materials and industrial products fell in June at the steepest rate since the end of 2011. Producer prices fell 0.4%, slightly more than was expected by analysts and sharper a drop than the -0.3% fall in May. Producer prices are up 1.6% from June 2011, according to the German Federal Statistics Office.

The price of basic goods fell -0.3% in June, while energy prices for producers fell -1.4%. Manufacturing material prices also fell -0.4% over the month.

In its July meeting, the European Central Bank cut the interest rate by 25 basis points to 0.75%, saying that inflationary pressures are not a concern in the Eurozone. Today’s lower German producer prices seem to come in line with the ECB’s policy and a continued drop in inflation would allow for further monetary policy to stimulate growth.

However, the drop in producer prices was not enough to affect Euro trading. EURUSD continues to trade right above a rising trend line from last week. Yesterday, the pair dropped about 50 points from 1.2300 following news of a weak Spanish bond sale and higher than expected US initial jobless claims.

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