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German inflation slows on weak price pressures in services

German inflation slows on weak price pressures in services
The LP12 Mall of Berlin shopping mall is pictured with Christmas decorations in Berlin, Germany, December 1, 2017. REUTERS/Fabrizio Bensch   -   Copyright  Fabrizio Bensch(Reuters)
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By Joseph Nasr

BERLIN (Reuters) – German annual inflation slowed by more than expected in August to within the European Central Bank’s price stability range, data showed on Thursday, supporting the ECB’s gradual approach to winding down its monetary stimulus.

German consumer prices, harmonised to make them comparable with inflation data from other European Union countries, rose by 1.9 percent year-on-year after an increase of 2.1 percent in the previous month, the Federal Statistics Office said.

This was below the average reading of 2.0 percent in a Reuters poll of analysts. The ECB targets inflation of close to but below 2 percent.

A breakdown of the non-harmonised data showed that price pressure were most manifest in energy products while services and food inflation slowed on the month.

This also lends more support to the ECB’s careful approach towards normalising its expansive policy.

Inflation in Europe’s largest economy is watched closely because of the weight it carries in the broader consumer price index for the euro zone, which will be published on Friday.

The German economy has been relying mainly on consumption as the export sector, the traditional propeller of growth, is weakening on rising trade frictions. Private consumption has grown in each quarter since the start of 2013.

It is expected to continue sustaining an upswing driven by low interest rates, a robust labour market, and government policies geared to boost German purchasing power.

“This only partly reflects a strong domestic economy. Energy prices are currently making a strongly positive contribution but are very volatile,” Joerg Zeuner, of KfW Bank wrote in a note to clients.

“This energy-price related effect should ease in the coming months. Consequently, inflation can only remain at the current healthy level in the longer run if wages and salaries continue to develop dynamically,” he added.

Regional data showed that prices for education services plunged by more than 20 percent as states such as Hesse abolished additional fees for childrens’ daycare.

On the month, EU-harmonised prices were flat, the preliminary numbers showed. That compared with the Reuters consensus forecast for an increase of 0.1 percent.

In Spain, Europe’s fourth-biggest economy, inflation fell to 2.2 percent in August, official data showed on Thursday.

Jack Allen of Capital Economics wrote in a note that the German and Spanish data pointed to August inflation in the euro zone slowing to 2 percent.

With price pressures building in the euro zone, the ECB plans to wrap up 2.6 trillion euros (2.34 trillion pounds) of bond purchases by the end of the year. But it has also said interest rates will remain at record lows through the summer of 2019.

“And looking ahead, we think that headline inflation across the region will slow over the next 12 months as energy inflation falls sharply,” Allen said.

He said this would be unlikely to cause the ECB to change its plans. “After all, we suspect that core inflation will rise, albeit very gradually, as diminishing spare capacity puts upward pressure on wage growth. So the Bank looks set to stay the course.”

(Writing by Joseph Nasr, additional reporting by Michael Nienaber; Editing by Paul Carrel and Jane Merriman)

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