(Reuters) - German annual inflation eased to its lowest level in 3-1/2 years in February, data showed on Thursday, underlining deflation fears and raising pressure on the European Central Bank to act.
The harmonized index of consumer prices (HICP) - the measure of inflation used by the European Central Bank - slowed to 1.0 percent year-on-year from 1.2 percent in January, preliminary data from the Federal Statistics Office showed.
The reading was last at 1.0 percent in August 2010. The consensus forecast in a Reuters poll of economists had been for it to decelerate to 1.1 percent.
Economists said the slowdown would fuel speculation about policy action from the ECB but they were not convinced the central bank would actually take measures, especially because the decline was mainly caused by lower energy prices.
"It means there's a higher chance we're going to see the euro zone inflation maybe even coming down tomorrow which will again increase pressure on the ECB to do more," said Carsten Brzeski, senior economist at ING.
"I don't think the ECB will do anything because confidence indicators have been too strong and it looks as if this period of low inflation will be over by the summer because it's still mainly a story of low energy prices."
Euro zone data due on Friday is expected to show inflation in the single currency bloc decelerated to 0.7 percent in February from 0.8 percent the previous month. The ECB targets inflation of close to but below 2 percent over the medium term in the euro zone.
ECB members have been at pains to stress there is no risk of deflation in the single currency bloc, with policymakers Peter Praet and Gaston Reinesch both saying on Tuesday it was not in the offing for now.
Other data published on Thursday showing lending to households and firms in the euro zone fell again in January and that money supply growth remained subdued also piled pressure on the ECB to act at next week's rate-setting meeting.
Consumer prices were up 0.5 percent on the month according to the HICP measure, less than the increase of 0.7 percent forecast in a Reuters poll.
Annual German inflation on a non-harmonized basis slowed to 1.2 percent in February, its lowest level since October, from 1.3 percent the previous month. The forecast in a Reuters poll had been for it to hold steady.
DOMESTIC DEMAND
The government expects inflation to hold steady at a moderate 1.5 percent this year. That bodes well for domestic demand, which the government sees propping up growth this year as foreign trade is expected to be a drag.
Low inflation, combined with a strong labor market, an expected rise in wages and low interest rates, should encourage traditionally thrifty Germans to spend rather than save.
Separate data from the Labor Office on Thursday showed German unemployment dropping in February to its lowest level in nearly 1-1/2 years. Berlin expects private consumption to climb by 1.4 percent this year as employment increases and nominal earnings rise.
Consumer morale is at its highest level in more than seven years because Germans have become more upbeat about their future income, a GfK survey showed this week.
This year chemical workers have already secured a 3.7 percent pay rise and other unions are seeking strong wage hikes, with construction workers even calling for a 7 percent increase.
Christian Schulz, senior economist at Berenberg Bank, said inflation could soon bottom out if workers got higher wages and splash more of their cash.
"In a tightening labor market, substantial wage demands have good a chance of going through and boosting consumption, which should raise inflation rates once spring arrives and the winter weather effects fade," he said.
Final German price data for February are due to be released on March 14, the statistics office said.
reuters.com
The harmonized index of consumer prices (HICP) - the measure of inflation used by the European Central Bank - slowed to 1.0 percent year-on-year from 1.2 percent in January, preliminary data from the Federal Statistics Office showed.
The reading was last at 1.0 percent in August 2010. The consensus forecast in a Reuters poll of economists had been for it to decelerate to 1.1 percent.
Economists said the slowdown would fuel speculation about policy action from the ECB but they were not convinced the central bank would actually take measures, especially because the decline was mainly caused by lower energy prices.
"It means there's a higher chance we're going to see the euro zone inflation maybe even coming down tomorrow which will again increase pressure on the ECB to do more," said Carsten Brzeski, senior economist at ING.
"I don't think the ECB will do anything because confidence indicators have been too strong and it looks as if this period of low inflation will be over by the summer because it's still mainly a story of low energy prices."
Euro zone data due on Friday is expected to show inflation in the single currency bloc decelerated to 0.7 percent in February from 0.8 percent the previous month. The ECB targets inflation of close to but below 2 percent over the medium term in the euro zone.
ECB members have been at pains to stress there is no risk of deflation in the single currency bloc, with policymakers Peter Praet and Gaston Reinesch both saying on Tuesday it was not in the offing for now.
Other data published on Thursday showing lending to households and firms in the euro zone fell again in January and that money supply growth remained subdued also piled pressure on the ECB to act at next week's rate-setting meeting.
Consumer prices were up 0.5 percent on the month according to the HICP measure, less than the increase of 0.7 percent forecast in a Reuters poll.
Annual German inflation on a non-harmonized basis slowed to 1.2 percent in February, its lowest level since October, from 1.3 percent the previous month. The forecast in a Reuters poll had been for it to hold steady.
DOMESTIC DEMAND
The government expects inflation to hold steady at a moderate 1.5 percent this year. That bodes well for domestic demand, which the government sees propping up growth this year as foreign trade is expected to be a drag.
Low inflation, combined with a strong labor market, an expected rise in wages and low interest rates, should encourage traditionally thrifty Germans to spend rather than save.
Separate data from the Labor Office on Thursday showed German unemployment dropping in February to its lowest level in nearly 1-1/2 years. Berlin expects private consumption to climb by 1.4 percent this year as employment increases and nominal earnings rise.
Consumer morale is at its highest level in more than seven years because Germans have become more upbeat about their future income, a GfK survey showed this week.
This year chemical workers have already secured a 3.7 percent pay rise and other unions are seeking strong wage hikes, with construction workers even calling for a 7 percent increase.
Christian Schulz, senior economist at Berenberg Bank, said inflation could soon bottom out if workers got higher wages and splash more of their cash.
"In a tightening labor market, substantial wage demands have good a chance of going through and boosting consumption, which should raise inflation rates once spring arrives and the winter weather effects fade," he said.
Final German price data for February are due to be released on March 14, the statistics office said.
reuters.com
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