* Annual inflation 2.5 pct in Oct, vs 2.6 pct in Sept
* Still well above ECB target, but trend downwards
* Strengthens case for near-term ECB rate cut
By Sarah Marsh
BERLIN, Oct 27 German annual inflation
unexpectedly slowed in October, strengthening the case for a
growth-boosting interest rate cut by the European Central Bank
in the near future as the region's economy weakens.
Prices still rose 2.5 percent on the year -- well above the
ECB's target of just under 2 percent. But this was mostly due to
energy prices, the Federal Statistics Office said on Thursday,
and down from a reading of 2.6 percent in September when
inflation jumped unexpectedly to a three-year high.
"The latest decline in the annual headline rate likely marks
the cyclical peak in consumer price inflation," said UniCredit's
Alexander Koch. "Another temporary uptick in the short term
cannot be ruled out. But leading price indicators suggest an
imminent turnaround in the price dynamic."
Inflation was unchanged on the month after accelerating 0.1
percent in September. A Reuters poll of economists had forecast
inflation to continue accelerating at 0.1 percent on the month
and 2.6 percent on the year.
Consumer prices harmonised to compare with other European
Union countries were unchanged month-on-month and gained 2.8
percent year-on-year. In September, prices had risen 0.2 percent
and 2.9 percent, respectively.
ECB POLICY DILEMMA
For much of the year, the ECB has faced the dilemma of
balancing monetary policy for Germany's strong economy and
struggling peripheral euro zone states.
Wages have risen this year as Europe's largest economy
expanded faster than expected and unemployment dropped, raising
fears of second-round inflation effects.
Next year, pensions could rise 2.3 percent and 3.2 percent
in western and eastern Germany, the country's pension insurance
association said on Thursday. Pensions rose only 1 percent this
year, and the government will determine their 2012 increase
early next year.
But economists see inflation decelerating as the economy
cools due to a global slowdown and uncertainty in the face of
the euro zone debt crisis impacting investment and exports.
German industry orders and output are slumping, and business
sentiment slid for the fourth month in a row in October, dipping
to its lowest level since mid-2010.
Furthermore, several ECB policymakers have said recently
that slowing economic growth in the euro zone as a whole was of
greater concern than inflation.
According to a Reuters poll of 70 economists published on
Tuesday, the region's economy now faces an even chance of
falling back into recession and the ECB will move to support it
by cutting rates to 1.25 percent, mostly likely in December but
possibly as early as next week.
"Several factors make an ECB rate cut desirable: we expect
inflation to decline over the course of next year as last year's
steep increases in energy cost drop out of the equation," said
Christian Schulz, economist at Berenberg Bank.
The German government forecast this month inflation would
decelerate to 1.8 percent next year from 2.3 percent this year.
"The weaker economic development should check upward
pressure on prices. In addition, (European) bank
recapitalisation efforts could put pressure on credit
availability and hamper the economic development in the euro
area," Schulz said.
"In these circumstances, a rate cut could have a positive
growth impact without shifting inflation risks to the upside,"
he said, noting this would likely happen in December.
Germany's flash inflation estimate is based on data from six
of the country's 16 states, which make up more than half the
In five of the six states, annual inflation accelerated in
October, but in Germany's most populous state of North
Rhine-Westphalia it eased on a large cut in tuition fees.
Final German price data for October are due for release on
Nov. 10, the office said.