German annual inflation unexpectedly slows in October

BERLIN Wed Oct 30, 2013 1:59pm GMT

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BERLIN (Reuters) - German inflation unexpectedly eased in October due to lower energy costs, remaining well below the ECB's target for the euro zone, preliminary data showed on Wednesday.

A 0.5 percent drop on the year in energy prices drove a slowdown in inflation to 1.2 percent from 1.4 percent in September, data from the Statistics Office showed. The European Central Bank targets inflation of close to but just below 2 percent.

The reading from the euro zone's dominant economy was the weakest in half a year and undershot even the lowest estimate in a Reuters poll for consumer prices to rise 1.3 percent. The consensus forecast had been for annual inflation of 1.4 percent.

Christian Schulz at Berenberg Bank said relatively mild weather at the start of the winter had kept energy prices low, but these would rebound as households switched on their heating, prompting inflation to accelerate.

"Although much of the current decline is driven by temporary factors, it allows the ECB to keep its dovish bias firmly in place," said Schulz. "With the economy gradually emerging from recession, inflation rates should start stabilising and then rising towards target again."

"But that is unlikely to occur before 2015, allowing the ECB to support the economy with the present very accommodative policy for a long time."

Inflation in Germany is still higher than in the euro zone on average, where it fell in September to its lowest in 3.5 years at 1.1 percent due to a weak economic recovery and shy domestic demand.

ING's Carsten Brzeski said low inflation was both good and bad news: "Bad news for the rest of the euro zone as it complicates the required price rebalancing across the euro zone, risking a race to the bottom. But also good news for German consumers.

"With record high employment and nominal wage increases, dropping inflation rates should further support private consumption. At least in Germany, one of Mario Draghi's new bromides should come true: 'with low inflation you buy more stuff'."

Earlier in the day, data showed German unemployment rising to its highest level since June 2011, though the unemployment rate remained close to its lowest level since reunification more than two decades ago.

Consumer prices harmonised to compare with other European Union countries fell 0.2 percent on the month and showed a year-on-year gain of 1.3 percent.

Final German price data for October are due to be released on November 12, the office said.

(Reporting by Sarah Marsh Editing by Jeremy Gaunt)

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