German states point to December inflation dip

BERLIN Thu Dec 29, 2011 10:11am GMT

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BERLIN (Reuters) - German consumer price inflation looks set to dip closer in December to the European Central Bank's euro zone target of just under 2 percent, based on figures from four states.

Annual inflation slowed sharply in the states of Saxony, Brandenburg and Hesse to 2.2, 2.1 and 1.7 percent respectively, data showed on Thursday. In November, inflation for these states stood at 2.6, 2.6 and 2.3 percent.

Inflation in Germany's most populous state, North Rhine-Westphalia (NRW), eased to its lowest rate in over a year, data showed on Wednesday. Prices rose 1.7 percent, down from 2.1 percent in November.

The regional preliminary figures suggest nationwide inflation in Germany, due out later on Thursday, is likely to slow for the third consecutive month.

The national figure is based on data from six out of 16 states that together account for more than half the population.

A Reuters poll of 27 economists has forecast a 2.2 percent annual rise in pan-German consumer prices, down from 2.4 percent in November.

An alternative measure of inflation, based on Europe's harmonised index of consumer prices (HICP) favoured by the ECB, is forecast to slow to 2.5 percent on the year from 2.8 percent in November.

Economists see German inflation easing in 2012 to below 2 percent, bringing it back in line with the ECB's target. The Ifo institute, for example, expects average inflation of 1.8 percent.

For much of this year, the ECB has faced the dilemma of balancing monetary policy for struggling peripheral countries and Germany's strong economy - which recovered swiftly from the 2008/09 financial crisis - against a backdrop of euro zone inflation that has consistently remained above its target.

After raising interest rates twice earlier in 2011 it then cut borrowing costs twice in the last two months as the euro zone economy lost momentum.

German growth has also eased over the past few months and many economists are now forecasting a mild slump for Europe's bulwark economy.

The euro zone as a whole seems almost certain to slip back into recession, which ECB Governing Council Member Ignazio Visco suggested in a newspaper interview on Saturday could prompt the bank to cut rates further.

He added that the ECB does not only respond to short-term inflation trends when setting policy.

Annual euro zone inflation, which held at 3 percent in November for the third month running, is expected to fall to 2.8 percent in December.

(Additional Reporting by Rene Wagner; Editing by John Stonestreet)

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