February 27, 2018 / 2:14 PM / 3 months ago

UPDATE 2-Weak German inflation shows ECB still facing uphill battle

* Consumer price inflation slows more than expected

* EU-harmonised rate hits 15-month low in February

* Data backs ECB’s cautious approach to ending stimulus (Adds pan-German data, analysts, background)

By Michael Nienaber

BERLIN, Feb 27 (Reuters) - German inflation slowed more than expected to hit a 15-month low in February, suggesting that price pressures in Europe’s largest economy are muted despite a robust upswing, rising wages and unprecedented monetary stimulus.

The weak data, released by the Federal Statistics Office on Tuesday, highlights the European Central Bank’s uphill battle in getting inflation in the whole euro zone close to its price stability target of just below 2 percent.

German consumer prices, harmonised to make them comparable with inflation data from other European Union countries, rose by 1.2 percent year-on-year after an increase of 1.4 percent in the previous month, the data showed.

That was weaker than the 1.3 percent forecast in a Reuters poll. It was also the lowest reading since November 2016 and marked the third consecutive fall in the headline figure.

“Even in Germany, it almost seems like a feat to reach an inflation rate of over 2 percent — despite low unemployment and relatively high wage settlements,” VP Bank economist Thomas Gitzel said.

Gitzel said he expected the combination of high growth rates and subdued inflation to continue in the coming months.

“Mario Draghi thereby lacks important arguments for a clear change of course. For the time being, higher interest rates remain nothing more than a pious wish,” Gitzel said.

The statistics office did not provide a preliminary reading for German core inflation. But regional data from the states suggested that cheaper energy costs and weaker food inflation were the main reasons for the drop in the headline figure.

The preliminary numbers also showed that EU-harmonised prices rose by 0.5 percent compared to January. This undershot a 0.6 percent rise expected by analysts.

Inflation figures from Europe’s largest economy are closely watched because of their influence on the ECB’s monetary policy.

Jessica Hinds of London-based Capital Economics said in a research note that German inflation remained subdued and that this would reinforce the position of ECB policy “doves” who are cautious about rapidly unwinding stimulus.

“Accordingly, while we think strong economic growth will encourage the ECB to remove the loosening bias from its forward guidance next month, we expect it to stress that interest rate hikes are a long way off,” Hinds added.

The German government expects national consumer price inflation (CPI) to slow to 1.7 percent this year from 1.8 percent in 2017 despite the booming economy.

In the euro zone as a whole, inflation is now comfortably above 1 percent but it is not expected to hit the ECB’s target for years to come.

The euro zone will publish preliminary inflation data on Wednesday, with the annual rate expected to edge down to 1.2 percent in February from 1.3 percent in January according to Reuters polls.

On Monday, ECB President Mario Draghi said the slack in the euro zone economy may be bigger than previously estimated and this could slow the rise of inflation temporarily.

Bundesbank President Jens Weidmann, a persistent critic of the ECB’s ultra-loose policies, offered a different view on Tuesday, however. He said rapid and broad-based economic growth in the euro zone would ensure that inflation continues to rise, and so the ECB should gradually reduce stimulus. (Reporting by Michael Nienaber Editing by Catherine Evans)

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