Factories in the euro zone reported the strongest monthly price increase on record for raw materials and fuel in January, according to a business survey that again showed German strength propelling the bloc's service sector.

Just as European Central Bank President Jean-Claude Trichet warned on Monday of building global inflation fears, the input price component of Markit's Flash Eurozone Purchasing Managers' Index (PMI) hit its highest since the series started in 1997.

There were also signs of rising price pressures in the euro zone's dominant services sector, which owed a faster rate of expansion in January to booming growth at German firms, and less so from No 2. economy France.

The Markit Flash Eurozone Services PMI, which measures activity in companies ranging from banks to hotels, rose more than expected to 55.2 from 54.2 in December, marking its 17th month above the 50 point dividing growth from contraction.

That services figure is quite sharply up and that tells you something about the extent to which the recovery in the euro zone is gaining momentum, said Peter Dixon, economist at Commerzbank.

German-led economic momentum also entails rising inflationary pressures from the euro zone's No.1 economy -- a growing headache for ECB policymakers tasked with keeping price stability in check while supporting struggling economies like Ireland and Spain.

PMI compiler Markit said factories highlighted higher prices for fuel, food and metals, such as steel and copper. Those are the same sources of inflation that prompted a warning from ECB President Trichet in an interview with the Wall Street Journal.

All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to ... be very careful that there are no second-round effects, Trichet said.


For the bloc's service sector firms, which account for around two-thirds of the euro zone economy, input prices also rose more quickly. But unlike manufacturers, prices charged for finished services fell slightly in January -- suggesting a growing corporate profits' squeeze.

This situation can be sustained for a while as euro zone businesses are generally in good financial shape, said Marie Diron, senior economic adviser to the Ernst & Young Eurozone Economic Forecast.

The flash euro zone manufacturing PMI edged down slightly to 56.9 from 57.1 in December as growth of new orders eased from an eight-month high, but its input price component surged to a record 79.8 from 74.1. The output price index also rose.

Price pressures have increased, especially in manufacturing, although weak demand in the periphery is helping to keep a lid on the pass-through of these costs to customers, said Markit's chief economist, Chris Williamson.

He said the PMI data was consistent with a quarterly growth rate of around 0.7 percent for the first quarter of this year.

Economists polled by Reuters last week expected the euro zone to produce meager economic growth of between 0.3 and 0.5 percent in each quarter through to the end of next year.

(Editing by Susan Fenton)