June 27, 2012 / 10:57 AM / 8 years ago

German inflation eases, giving ECB wiggle room

BERLIN (Reuters) - Annual inflation in Europe’s largest economy decelerated in June to its lowest rate in 18 months and stood below a 2.0 percent benchmark for price stability for a second month running, leaving the European Central Bank room to cut interest rates.

German consumer price inflation eased more than expected to 1.7 percent year-on-year, from 1.9 percent in May, helped by falling oil prices, according to preliminary data released by the Federal Statistics Office on Wednesday.

“The data add to the already strong case for ECB action at next week’s meeting,” said Berenberg economist Christian Schulz.

“Leading economic indicators for Germany have dropped sharply, for the periphery they remain at low levels. Credit data suggests that a moderate credit crunch may be occurring in the crisis countries,” Schulz said, adding that the ECB was likely to cut rates and do more to boost lending.

Germany’s inflation rate remained consistently above the price stability target for the euro currency area of just under 2.0 percent for much of last year. It slipped below the target in May, giving the ECB more scope to loosen policy as the euro zone debt crisis worsens.

Recent indicators have suggested Germany’s economy, which has posted solid growth during the crisis, is losing stamina. The country’s private sector shrank for the second month running in June, while business sentiment fell to its lowest level in over two years.

While the euro zone’s central bank left interest rates unchanged in June at 1.0 percent, many economists expect the ECB to cut interest rates in the coming months.

The easing in inflation is welcome news for Germans, for whom anxious memories remain of the early 1920s, when their currency spun so far out of control it became almost worthless.

It should also give a boost to consumers, whose spending is expected to be the German economy’s saving grace this year as the crisis starts to hit home. Data this month showed exports, Germany’s traditional engine of growth, fell more than expected in April, putting the onus on domestic demand.

INFLATION TO ACCELERATE

Economists said German inflation was still likely to speed up in the medium-term due to stronger growth than in the rest of the euro zone and the most significant wage deals in years.

“The inflation rate’s downward trend will probably not continue for long,” Commerzbank analyst Ulrike Rondorf said. “Due to higher wage agreements, consumer prices could broadly rise more sharply.”

Both the German government and central bank hinted last month that they would tolerate higher prices as long as euro-wide inflation remained under control, in a move that could help struggling euro zone countries boost their competitiveness.

“We expect German inflation to slowly move to the higher band of euro zone national inflation rates as the rest of the currency zone is regaining lost competitiveness vis-à-vis Germany,” Berenberg’s Schulz said.

Annual euro zone inflation, which eased further than expected to 2.4 percent in May, its lowest level in 15 months, is expected to remain steady in June.

German consumer prices harmonized to compare with other euro zone countries showed a monthly fall of 0.2 percent and a year-on-year increase of 2 percent, compared with a monthly drop of 0.2 percent and an annual gain of 2.2 percent in May.

Germany’s preliminary inflation estimate is based on data from six of the country’s 16 states, which make up more than half the population. Final German price data for June are due to be released on July 11, the office said.

Editing by Catherine Evans

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