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German inflation spike creates dilemma for ECB

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German inflation spike creates dilemma for ECB

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German inflation unexpectedly jumped this month to its highest level in three years.

Annual consumer price inflation rose to 2.6 percent from2.4 percent in August. Economists had expected it to hold steady.

The increase will make it more difficult for the European Central Bank to justify a cut in interest rates soon in order to boost growth in the euro zone.

Germany’s harmonised index of consumer prices (HICP) — the ECB’s preferred measure of inflation — also rose more than expected, hitting 2.8 percent from 2.5 percent in August.

“It’s a precarious situation,” said analyst Michael Schubert from Commerzbank. “Rising prices in Germany make it difficult to decide over policy for the broader euro zone, although the bank will likely keep rates on hold for now and maybe think of lowering them if data worsens in October.”

For the moment, most economists expect Germany will avoid a repeat of the surprise September data in the months ahead, which would make life easier for the ECB.

Recent figures suggest growth in Europe’s largest economy is set to slow on the back of the global downturn, and economists expect inflation to ease from a cyclical peak.