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UPDATE 2-Strong German, Spanish inflation firms up case of ECB hawks
August 30, 2017 / 1:01 PM / 23 days ago

UPDATE 2-Strong German, Spanish inflation firms up case of ECB hawks

* German consumer prices up 1.8 pct in Aug vs Aug 2016

* Spanish inflation jumps to 2.0 pct year/year

* Both stronger than expected

* Figures may give ECB food for thought

* Governing council meets next week (Adds economist on ECB debate)

By Michael Nienaber and Sarah White

BERLIN/MADRID, Aug 30 (Reuters) - German and Spanish consumer prices rose more than expected in August, data showed on Wednesday, suggesting that solid growth in both economies is nudging inflation rates up towards the European Central Bank’s target.

The strong figures come only days after ECB President Mario Draghi urged patience in the debate about the bank’s ultra-easy monetary policy, saying more time was needed to lift inflation to its target of nearly 2 percent for the 19-member bloc as a whole.

German consumer prices, harmonised to compare with other European countries (HICP), rose 1.8 percent on the year in August, up from a 1.5 percent annual increase the previous month, the Federal Statistics Office said. This was the strongest rate since April. On the month, prices rose 0.2 percent.

A Reuters poll had pointed to increases of 1.7 percent on the year and 0.1 percent on the month.

In Spain harmonised consumer prices rose 2 percent year-on-year, slightly above forecast, on the back of strong growth in the euro zone’s fourth-largest economy.

Capital Economics analyst Jennifer McKeown said the data pointed to a rise in euro zone inflation to about 1.5 percent this month from 1.3 percent in July.

That would be slightly higher than the Reuters consensus forecast for euro zone inflation to accelerate to 1.4 percent.

“But the relatively subdued rates of core inflation in both economies support the ECB’s inclination to reduce its policy support only gradually,” McKeown said.

The euro zone will publish preliminary inflation data for August on Thursday.

A breakdown of non-harmonised German data showed energy and food costs were the main drivers price growth this month, while the cost of services did not rise as strongly as in July.

“Inflation is pointing upward because the German economy is in full swing,” KfW bank chief economist Joerg Zeuner said, adding there was no end in sight to the upturn.

“This is good news for the ECB. It can continue its course towards normalisation,” he said.

The German economy grew 0.7 percent on the quarter in the January-March period and by 0.6 percent in the second quarter, driven by domestic demand as consumers and authorities are benefiting from high employment and low borrowing costs.

In a sign the upswing is translating into higher income, negotiated wages rose 3.8 percent on average in the second quarter - the biggest increase on record, data showed on Wednesday.

ASSET BUYS

While ECB stimulus has pushed euro zone growth to over 2 percent, the fastest since 2011, inflation is expected to undershoot the bank’s target at least through 2019.

ECB policymakers have agreed to decide this autumn whether to extend or wind down their 2.3 trillion euro ($2.7 trillion) asset purchase program, which is due to expire in December.

Hawks on the policy-setting council will point to rising inflation as justification for a quick end to the asset buys, as Bundesbank President Jens Weidmann did last week.

The governing council next meets on Sept. 7.

“In all, the latest data seem to confirm that underlying inflation pressures have strengthened over recent months in parts of the euro zone,” McKeown said. But she added that the pick up was not sharp and did not apply for the entire bloc.

“So while the ECB still seems set to taper its asset purchases next year, it will do so slowly and we doubt that it will be ready to announce its plans when it meets next week.” ($1 = 0.8392 euros) (Reporting by Michael Nienaber and Sarah White; Editing by Toby Chopra and Hugh Lawson)

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