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Cheap energy pulls down euro zone producer prices drop in July

BRUSSELS (Reuters) - A drop in the highly volatile energy prices depressed euro zone producer prices in July as expected, underlining disinflationary pressures in the single currency area ahead of the European Central Bank's monetary policy meeting on Thursday.

Prices at factory gates in the 18 countries sharing the euro fell as anticipated by 0.1 percent in July against June and dropped 1.1 percent on the year, the EU's statistics office Eurostat said on Tuesday.

The annual drop was the steepest since April's 1.2 percent decline.

Producer prices are an early indication of price trends. Unless their fluctuations are absorbed by retailers, they eventually translate into consumer inflation or deflation.

Both the monthly and the annual declines were influenced by a 0.6 percent and 3.5 percent drop respectively in the costs of energy, data showed.

Prices in all other sectors, such as durable and non-durable consumer goods, were flat in July when compared with June.

The ECB meets on Thursday, facing a dilemma how to respond to vanishing inflation in the 9.6 trillion euro economy whose recovery unexpectedly stalled in the second quarter, only two months after an interest rate cut in June.

A majority of economists expect the ECB to stay on hold in September and wait for effects of its last rate cut to kick in, including targeted longer-term refinancing operations aimed to boost bank landing.

Producer prices in July, when compared with the same period last year, rose only in three euro zone countries - Estonia, Ireland and Latvia and were flat in the twice bailed-out Greece.

The largest year-on-year drop was recorded in Belgium with a 5.7 percent decline, followed by Slovakia's 2.9 percent annual fall.

(Reporting by Martin Santa)

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