Inflation Worries Hammer German Retail Sales

German retail sales posted their steepest decline in October since a value-added tax increase sent them plunging at the start of the year, in a sign that consumers are increasingly worried about higher energy and food prices.

Preliminary figures from the Bundesbank showed retail sales fell 2.7 percent month-on-month in October and by 4.4 percent on an annual basis.

Both drops, which were mirrored in separate retail sales figures from the Federal Statistics Office, were the largest since January, when a 3-percentage point rise in VAT hammered consumer spending.

"The sharp rises in the cost of energy and foodstuffs have shown an effect for the first time," aid Alexander Koch of Unicredit. "With the strong labor market, a slight gain in private consumption is possible in the coming quarters. There can be no talk of a consumption binge, however."

Data released last week showed annual inflation had accelerated to a near 14-year high of 3.0 percent in November, driven by surging oil and food prices.

Concerns about higher prices appear to be overshadowing optimism about improved labor market conditions. On Thursday, figures showed Germany's jobless total fell this month to its lowest level in more than a decade.

Economists have been hoping that stronger German consumption would compensate for an expected decline in export growth linked to the strong euro and weaker demand from the United States.

After posting growth of 2.9 percent last year, Germany's strongest rate since 2000, the economy is expected to expand at a more modest 2.5 percent this year, slowing to around 2.0 percent in 2008.

Seventh Straight Annual Drop

The statistics office data, which unlike the Bundesbank figures excludes sales of vehicles and turnover at petrol stations, showed a 3.3 percent month-on-month drop in retail sales and a 0.6 percent decline on an annual basis -- the seventh consecutive year-on-year drop.

Economists polled by Reuters had forecast a month-on-month decline of 0.2 percent and an annual rise of 0.4 percent. The numbers are based on figures from seven German states accounting for roughly 76 percent of total sales volume.

Germany's HDE retail association said on Wednesday that retail sales could fall by as much as 2 percent this year, citing inflation.

"This year, rising food and energy prices have weakened purchasing power," HDE President Josef Sanktjohanser said.

"Christmas shopping is, for us, more important than ever because this year retail sales were not all that pleasing."

Germany's biggest retailer Metro posted a rise in third quarter earnings last month and raised its sales forecast for 2007, but that was mainly due to strong growth in eastern Europe.

At home, where the company makes 40 percent of its revenue, like-for-like sales fell in three of its four units.

German Finance Minister Peer Steinbrueck tried to play down worries about inflation in an interview with the Financial Times Deutschland published on Friday, saying experts expected the rate to dip below 2 percent again next year.

But European central bankers have warned they are ready to counter rises in energy prices if they show signs of filtering through to the broader European economy.