UPDATE 2-German Aug inflation dips; no pressure on ECB

Mon Aug 29, 2011 9:58am EDT

Related Topics

* German inflation eases in line with forecasts to 2.3 pct y/y

* Still well above ECB's target of just under 2 pct

* But economy likely cooling, so no concern to ECB - analysts (Updates with pan-German figures)

By Sarah Marsh

BERLIN, Aug 29 (Reuters) - German annual inflation eased in August in line with forecasts, suggesting price pressures in Europe's top economy may have peaked, giving the European Central Bank one more reason not to raise interest rates any time soon.

Preliminary data from the Federal Statistics Office showed consumer prices rose 2.3 percent, still above the ECB's target of just under 2 percent, but down from a 2.4 percent rise in the previous month.

Month-on-month, consumer prices fell 0.1 percent in August on lower energy prices, compared to a 0.4 percent rise in the previous month. This was also in line with economists' forecasts in a Reuters poll.

"With a weakening euro zone economy, slowing credit growth and waning inflationary pressure in the euro zone's economic powerhouse, it is hard to find a lot of upward risks to inflation," said Carsten Brzeski at ING Financial Markets. "Will this lead to a tide change at the ECB?"

The ECB's preferred measure of inflation, the harmonised index of consumer prices (HICP), eased to 2.4 percent from 2.6 percent in July and versus a forecast for 2.5 percent.

Until recently the ECB was beset with the dilemma of balancing monetary policy for Germany's strong economy and for struggling peripheral euro zone states.

But recent data suggest the German economy is slowing sharply, and analysts say inflation will likely also ease as a result.

In the meantime, markets have priced out expectations of an ECB rate hike for the foreseeable future, with some indications the next move could even be a cut.

German business morale posted its steepest drop this month since the aftermath of the Lehman Brothers collapse in late 2008, data from Ifo think tank showed last week, and economic growth slowed to a meagre 0.1 percent in the second quarter of the year.

"The figures are a further sign that inflation already reached its peak this year, and can no longer be an issue for the ECB," said Sebastian Wanke at Dekabank. "In the short- to medium-term at least, inflation should no longer cause any worries."

Among the six regional states however, the annual rate of consumer price inflation was only in line with the ECB's target in Hesse, home of the financial capital Frankfurt, where it fell to 1.9 percent in August from 2.2 percent.

Germany's flash inflation estimate is based on data from six of the country's 16 states, which make up more than half the population. These regional figures had shown easing pressure from energy prices, and to a lesser extent from fresh foods due to seasonal changes.

"Looking at the available components at the regional levels shows that lower inflation is not only the result of lower oil prices," said ING's Brzeski.

"In fact, there seems to be a broader trend of dropping prices in the German economy. Prices for goods have been on a downward trend since June, with a sharp drop in consumer goods in August."

Consumer prices in North Rhine-Westphalia, Germany's most populous state, rose by 2.3 percent on the year in August, versus a 2.7 percent rise the month before.

(Additional Reporting by Klaus Lauer and Rene Wagner; Editing by John Stonestreet) (Reporting By Sarah Marsh; editing by Patrick Graham)

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