Easing German inflation still above ECB target

BERLIN Wed Sep 26, 2012 10:41am EDT

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BERLIN (Reuters) - Inflation in the euro zone's largest economy of Germany slowed in September, but not by enough to support the case for a recession-fighting interest rate cut by the European Central Bank.

Preliminary data showed annual inflation slowed to two percent on seasonal factors such as reduced food and travel costs, matching a Reuters consensus forecast. The measure fell from 2.1 percent in August when it jumped on energy prices.

The European Central Bank aims to keep inflation close to, but just under, 2 percent in the euro zone as a whole.

"Over the past two to three months, there has not been a trend of price easing in Germany which would catch anybody's attention and influence the debate at the ECB over rates," said Holger Schmieding at Berenberg Bank.

"The Bundesbank would still say it is at 2 percent, which is the upper limit of where it is allowed to be, so nobody will use it as an argument for a rate cut."

For much of last year Germany's inflation rate remained above 2.0 percent, as its economy outperformed that of its peers, fuelling robust wage rises across many sectors.

This posed a dilemma for the ECB, struggling to balance monetary policy for Europe's largest economy and powerhouse with policy for the struggling southern periphery.

Germany is now beginning to feel more of the pain from the euro zone crisis as weaker demand in austerity-hit countries weighs on exports. A survey on Monday showed business sentiment dropped for a fifth straight month in September, raising fears of a recession.

But economists said inflation, which regained momentum in August after briefly dipping below the 2 percent mark in the summer, looked unlikely to ease sustainably any time soon. Energy and food prices, as well as the ECB's policies and a pickup in the economy, all risked fuelling price pressures.

"We are sticking to our forecasts for inflation of 2.0 percent this year and 2.1 percent next year, but we do also see upward risk at the moment," said Thilo Heidrich at Postbank, mentioning oil and food prices, which "could rise due to many droughts in various parts of the world".

INFLATION RISK

Oil prices have shot up since June with international sanctions hitting Iranian exports and the U.S. central bank launching fresh stimulus measures, which tend to boost commodities.

Meanwhile, food prices have risen after the worst drought in half a century in the United States and poor crops from the Black Sea bread basket hit corn, wheat and soybean supplies.

Berlin and the Bundesbank have hinted they would tolerate higher prices as long as euro-wide inflation remains under control. That could help ailing euro zone countries boost their competitiveness.

But a Reuters poll of 41 economists shows data due to be released on Friday will likely show euro zone prices rose 2.5 percent in September.

The ECB kept its main refinancing rate at a record low of 0.75 percent at its September policy meeting, and ECB Executive Board member Benoit Coeure on Sunday downplayed expectations for a near-term rate cut, saying recent economic and inflation data do not justify it and confidence was returning.

On a monthly basis, German consumer prices were unchanged in September, according to the preliminary data from the Federal Statistics Office.

Consumer prices harmonized to compare with other European Union countries were unchanged on the month and rose 2.1 percent on the year, down from 2.2 percent in August.

The Statistics Office's preliminary inflation calculations are based on data contributed by six German states. Final German price data for September are due to be released on October 11, the office said.

Inflation had only accelerated in one of the six states, in Baden-Wuerttemberg, for the most part slowing on lower food and travel costs.

(Additional Reporting by Klaus Lauer, Editing by Gareth Jones and Toby Chopra)

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