U.S. Markets

German inflation turns negative in April, weaker than expected

BERLIN (Reuters) - German consumer prices unexpectedly fell in April, data showed on Thursday, illustrating the scale of the task the European Central Bank faces in trying to propel inflation back to its target range.

The euro zone has struggled with little or no inflation for the past year and the ECB expects the bloc-wide figure to turn negative again before slowly ticking up, undershooting its goal of just under 2 percent for years to come.

The ECB unveiled a surprisingly large stimulus package in March but falling inflation expectations have fueled expectations of even more easing, possibly as early as June, when the bank’s staff present new growth and inflation forecasts.

“It might be hard for some German ECB critics to digest, but if the strongest euro zone economy with low unemployment does not show any signs of inflationary pressures, the ECB after all might have a point in continuing its ultra-loose monetary policy,” ING Bank economist Carsten Brzeski said.

Separate data on Thursday showed unemployment unexpectedly fell in April, with the jobless rate remaining at its lowest in more than 25 years.

German consumer prices, harmonized to compare with other European countries (HICP), fell by 0.3 percent on the year after a 0.1 percent rise in March, the Federal Statistics Office said. The Reuters consensus forecast was for a zero reading.

On a non-harmonized basis, consumer prices fell by 0.4 percent on the month and inched down by 0.1 percent on the year. A breakdown showed energy remained the main drag while the food, services and rental costs increased at a slower pace.

Related Coverage

Analysts said the German data suggested that the April inflation rate for the whole euro zone, due out on Friday, would also turn negative again.

Economists polled by Reuters so far expect a reading of -0.1 percent, down from 0.0 percent in March.

“German inflation is likely to remain very weak over the next couple of months before energy (base) effects push it to around 1.5 percent by year-end,” Capital Economics analyst Jennifer McKeown said.

Due to the economic upswing and the robust labor market, price pressures in Germany are not as weak as elsewhere in the euro zone. Still, inflation expectations are very subdued and wage growth has slowed recently.

“Even in the euro zone’s largest and arguably strongest economy, inflation seems unlikely to reach the ECB’s near 2 percent target over the medium term,” McKeown said. The weak data was adding to pressure on the ECB to do more, she added.

On Wednesday, ECB policymakers played down the need for more near-term stimulus, calling for people to wait for existing measures to take effect.

(In this April 28 story, Federal Statistics Office corrects April HICP to -0.5 pct m/m ..not.. -0.3 pct m/m, April HICP to -0.3 pct y/y ..not.. -0.1 pct y/y, April CPI to -0.4 pct m/m ..not.. -0.2 pct m/m, April CPI -0.1 pct y/y ..not.. +0.1 pct y/y, CPI sub-index for services to +0.8 pct ..not.. +1.1 pct)

Reporting by Michael Nienaber; Editing by Balazs Koranyi and John Stonestreet