CORRECTED-UPDATE 1-German price data adds to euro zone deflation concerns

Mon Jan 6, 2014 10:28am EST

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(Corrects month of ECB cut in paragraph 10)

* EU-harmonised German inflation slows to 1.2 percent

* Partly due to change in methodology of calculating HICP

* Slowdown adds pressure on ECB to act to stave off deflation

By Sarah Marsh

BERLIN, Jan 6 (Reuters) - A closely-watched measure of German inflation decelerated sharply in December to 1.2 percent, adding to fears of deflationary pressure across Europe.

Economists said the slowdown was in part due to a change in methodology but the numbers may still add pressure on the European Central Bank to take some action to stave off any deflation threat.

The harmonised index of consumer prices (HICP) - the measure of inflation used by the ECB - showed inflation slowing to 1.4 percent year-on-year in December, undershooting the consensus forecast in a Reuters poll of economists and down from 1.6 percent in November.

Both numbers are below the ECB's close-to-but-below 2.0 percent target.

Data due on Tuesday is forecast to show euro zone inflation steady at 0.9 percent in December for the second month. A drop to 0.7 percent in October prompted an interest rate cut.

Other euro zone countries are suffering from below target price inflation.

"The gap between Germany and the euro zone is no longer big enough to cause a policy headache for the ECB," said Holger Schmieding at Berenberg Bank, referring to the ECB's one-size-fits-all interest rate policy in view.

Schmieding and other economists pointed out that a change in the methodology of calculating holiday prices in Dec. 2012 had artificially boosted this rate since but had now dropped out of the annual comparison, allowing the year-on-year rate of HICP inflation to fall back to its underlying trend.

The HICP for the full-year 2013 decelerated to 1.6 percent from 2.1 percent in 2012. The statistics office said cheaper oil in the light of the weaker world economy had driven the deceleration in 2013 inflation.

Since the ECB cut rates to a record low in November, several ECB policymakers have said there is no risk of deflation in the euro zone, but should it emerge they would still have options to address it.

"We are not seeing any deflation at present... but we must take care that we don't have inflation stuck permanently below one percent and thereby slip into the danger zone," ECB President Mario Draghi told a German magazine last month.

Dirk Schumacher at Goldman Sachs said the release of the German figure suggested euro zone inflation data later in the week would show a slowdown to 0.8 percent.

ACCELERATING INFLATION IN 2014

However, in Germany, which has outperformed peers throughout much of the currency bloc's crisis, inflation is seen accelerating over the coming years. Fragmented inflation across the euro zone could then become a policy headache for the ECB.

The German government said in October it saw consumer prices rising 1.8 percent in 2014. The IfW think tank says it could accelerate to 2.5 percent because low ECB interest rates could cause the economy to "even overheat".

Consumer prices on a non-harmonised basis accelerated in line with expectations in December to 1.4 percent on the year from 1.3 percent in the previous month.

Italy and Spain reported inflation rates of just 0.6 and 0.3 percent respectively last week while prices in Greece fell at a rate of 2.9 percent year-on-year at the last count.

Markit's euro zone composite Purchasing Managers Index (PMI), released earlier on Monday, suggested however that the gap between Germany and the rest of the currency bloc may be narrowing.

The survey showed businesses across the euro zone enjoyed a strong finish to 2013 as almost two years of job cuts came to an end last month. Moreover it suggested the region was on track to record modest economic growth in 2014. (Additional reporting by Eva Kuehnen in Frankfurt and Klaus Lauer in Berlin; Editing by Jeremy Gaunt)

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