UPDATE 1-German inflation is lowest in years, adds to case for ECB action

Mon Jun 2, 2014 9:34am EDT

(Recasts, adds detail)

By Michelle Martin

BERLIN, June 2 (Reuters) - Annual inflation in Europe's largest economy slowed to its weakest in years in May, data showed on Monday, probably pushing down the euro zone rate and cementing expectations the European Central Bank will ease monetary policy this week.

Consumer prices harmonised to compare with other European Union countries - the ECB's preferred measure - showed a rise of 0.6 percent, far less than the 1.0 percent expected in a Reuters poll. It was the lowest reading since February 2010.

Commerzbank economist Johannes Werner said the data suggested the broader euro zone rate, due out on Tuesday, fell sharply from April's reading of 0.7 percent, which was already well below the ECB target of just under 2 percent.

"Consumer prices in other euro zone countries also generally had surprising falls in May so the euro zone inflation rate, due out tomorrow, will probably fall to 0.5 percent," he said.

A Reuters poll conducted before the German data for May was published had shown economists expected it to hold steady.

Economists said Monday's data suggested the ECB would take action at its rate-setting meeting on Thursday.

"We think the numbers substantiate expectations that the ECB will loosen monetary policy this week," said Ralf Umlauf, economist at Helaba.

Based on the national statistical measure, German consumer prices increased by 0.9 percent on the year in May, the preliminary Federal Statistics Office data showed.

That was the weakest reading since June 2010 and came as the cost of energy fell and food prices had their smallest rise in more than four years.

Economists polled by Reuters had expected the annual reading to slow to 1.1 percent from 1.3 percent in April.

On a monthly basis, German consumer prices fell 0.1 percent compared with a drop of 0.2 percent in April.

Final German price data for May are due to be released on June 13, the office said.

Last week ECB Vice President Vitor Constancio said the ECB was not complacent about the risks from a protracted period of low euro zone inflation and would act if necessary while Governing Council member Ignazio Visco said excessively low inflation in the euro zone should be dealt with as firmly as high inflation.

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For a graphic on German inflation, click on:

link.reuters.com/fys75v ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ (Reporting by Michelle Martin; Editing by Noah Barkin and John Stonestreet)

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