July 28, 2017 / 10:09 AM / 2 years ago

German inflation beats expectations, still short of ECB target

BERLIN (Reuters) - German consumer inflation was stronger than expected last month but remained well below the European Central Bank’s target for the euro zone of just under 2 percent, suggesting it and a robust Spanish reading are unlikely to hasten policy tightening.

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Federal Statistics Office data on Friday showed German consumer prices harmonised to compare with other European countries (HICP) rose by an annual 1.5 percent in July, the same as in June and above the 1.4 percent forecast in a Reuters poll.

A breakdown of non-harmonised data showed the increase was caused by a sharp increase in food prices in particular, but that prices in all other categories — rents, goods, services and energy — also rose.

Stephen Brown, European economist at Capital Economics, said the data pointed to a real pick-up in the underlying core rate of inflation in Europe’s largest economy but that the ECB was still a long way from raising interest rates.

“At the moment core inflation in Germany is still quite low and it’s still far too low to bring core inflation up across the euro zone as a whole,” he said.

The euro zone will publish preliminary inflation data on Monday, with the annual rate expected to hold steady at 1.3 percent according to a Reuters poll. ECONEZ

Earlier on Friday, data had shown Spanish consumer prices, harmonised for comparison with European Union countries, rising by 1.7 percent year-on-year in July — higher than a consensus forecast of 1.5 percent.

“The ECB will take some encouragement and certainly feel that tapering is now the right thing to do,” Brown said.

The ECB is expected to curb stimulus from the start of next year, arguing that better growth on its own provides the economy with increased support so it has room to tighten policy to keep the overall level of accommodation unchanged.

Any move by the ECB is likely to be modest and gradual as underlying inflation, or price growth excluding food and fuel prices, is barely above 1 percent and still shows no sign of upward pressure — a worrisome trend that is often overshadowed by more volatile headline inflation.

The ECB is also concerned that wages are not responding to better growth and a quicker-than-expected drop in unemployment.

That may suggest the nature of wage-setting and ultimately inflation has changed since the global financial crisis or at least that there is greater slack in the economy than figures reveal.

Separate data released on Friday showed euro zone economic sentiment rose slightly for a third consecutive month in July to a new 10-year high, against expectations of a dip from June.

On Wednesday Ewald Nowotny, a member of the ECB’s rate setting Governing Council, said with economic growth picking up strength and the threat of deflation gone, the ECB had room to claw back stimulus but only moderately since inflation remains far below its target.

On the month, German EU-harmonised prices increased by 0.4 percent — more than the 0.3 percent rise forecast in a Reuters poll.

Additional reporting by Erik Kirschbaum in Berlin and Balazs Koranyi in Frankfurt; Editing by Thomas Escritt and Catherine Evans

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