October 30, 2014 / 2:10 PM / 4 years ago

UPDATE 2-German inflation slowdown shows deflation risk remains

(Adds Merkel and economist quotes, Spanish data, details)

BERLIN, Oct 30 (Reuters) - Annual inflation in Europe’s largest economy, Germany, unexpectedly slowed in October while Spanish consumer prices fell, suggesting the risk of deflation in the wider euro zone has not yet abated.

Data from the German statistics office showed preliminary inflation harmonised to compare with other European countries slowed to 0.7 percent, the weakest reading since May. Economists polled by Reuters had forecast inflation would pick up to 0.9 percent from 0.8 percent in September.

The European Central Bank targets inflation of just under 2 percent for the euro zone as a whole.

Spanish EU-harmonised consumer prices fell by 0.2 percent on an annual basis in October, in line with forecasts and compared to a decline of 0.3 percent in the month before.

A Reuters poll conducted ahead of the German and Spanish numbers found economists expected preliminary euro zone inflation, due on Friday, to edge up to 0.4 percent from last month’s nearly five-year low of 0.3 percent. The ECB considers anything below 1 percent to be in its “danger zone”.

Carsten Brzeski, senior economist at ING, said the German data made it less likely the euro zone figure would meet that forecast. “It has increased odds that it’s going to remain stable and not go up,” he said.

ECB Governing Council member Christian Noyer said this week that the central bank would not accept inflation remaining stuck below target.

The ECB holds its next policy meeting on Nov. 6.

Brzeski said the German data would not push the bank to act quickly, given other recent euro zone economic numbers have not been as bad as feared. Demand from companies for loans from euro zone banks also rose in the third quarter and is seen climbing sharply in final three months of the year.

“(That) and a growth-supportive package of lower energy prices and a weaker euro exchange rate should allow the ECB to wait at least until the December meeting before possibly deciding on new action,” Brzeski added.

Energy prices fell by 2.3 percent on the year in October and goods became 0.1 percent cheaper compared with the same month last year, but the cost of services increased by 1.7 percent.

Commerzbank economist Marco Wagner said the euro zone inflation rate was unlikely to rise in the next few months as the 18-country currency bloc’s economy is still weak and energy prices are likely to fall further.

“The excruciatingly slow recovery of the euro zone should dampen underlying inflation,” he said, adding that he expected the ECB to decide on a broad-based government bond purchase programme soon due to persistently low euro zone inflation.

Data earlier on Thursday showed German unemployment unexpectedly fell by 22,000 in October. A strong labour market, combined with moderate inflation and rising wages, is helping prop up domestic demand in Germany and the government is banking on this to support growth this year and help compensate for weak exports, the economy’s traditional growth driver.

Chancellor Angela Merkel said on Thursday that demand in Europe’s biggest economy would remain strong.

“We’re seeing very good domestic demand in Germany and we’ve also done a lot to improve domestic demand,” she said after a meeting with Slovenia’s prime minister.

“For our neighbours, it’s often very important that Germany is a good customer with regards to domestic consumption and we can promise that this will be the case in future too despite the weaker economic data.”

Non-harmonised data showed German annual consumer price inflation steady at 0.8 percent for a fourth month running. (Reporting by Michelle Martin; Additional reporting by Andreas Rinke; Editing by Catherine Evans)

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