August 28, 2015 / 10:17 AM / 5 years ago

Ultra-low German inflation keeps pressure on ECB

BERLIN (Reuters) - German inflation remained close to zero in August, keeping pressure on the European Central Bank to consider additional stimulus measures as the falling cost of oil and a slowdown in China put the brakes on prices.

A woman checks vegetables at the Biocompany organic supermarket in Berlin, January 31, 2013. REUTERS/Fabrizio Bensch

Preliminary data for Europe’s largest economy showed on Friday that annual consumer price inflation harmonised to compare with other European countries (HICP) held steady at 0.1 percent.

The figure, which matched a Reuters consensus forecast, remains far below the ECB’s inflation target for the broader euro zone of just below 2 percent over the medium term.

That, along with data earlier in the day showing EU-harmonised prices fell 0.5 percent year-on-year in Spain, will give the central bank pause for thought as it prepares for its six-weekly policy meeting on Thursday.

Before then, policymakers will also have preliminary inflation data for the euro zone to digest. That is due on Aug. 31 and economists polled by Reuters expect the reading to hold steady at 0.2 percent. ECONEZ

Economists said they did not expect the ECB to beef up next week the bond-buying programme it launched in March, though such moves were possible in time.

The central bank’s chief economist Peter Praet said earlier this week that it stands ready to do more and has pledged to bolster the programme if necessary.

ING economist Carsten Brzeski said the slump in commodity prices meant headline inflation in Germany could drop below zero in the coming months.

“While low inflation or even negative inflation rates are a blessing for German consumers, they could become a new headache for the ECB,” he said.

The recent oil slump, which has centred on concerns over slowing Chinese growth, is complicating the ECB’s efforts to push inflation in the euro zone back towards its target over the medium term via bond-buying.

Economists expect the recent tumble in commodity prices to force the ECB to downwardly revise its inflation forecasts after the Sept. 3 governing council meeting.

But Brzeski expects the central bank to hold off on further measures to ward off deflation.

“I think they will give hints next week that they might step up QE rather than reducing the QE efforts but right now it’s too early for them to take concrete action.”

Capital Economics economist Jennifer McKeown also said the ECB was unlikely to act next week.

“But we still expect a lack of inflationary pressure to cause it to extend and perhaps increase the pace of its asset purchase programme in time,” she said.

A breakdown of the preliminary German price data - for which final figures are due on Sept. 11 - showed a sharp drop in energy prices while the cost of goods also fell.

Reporting by Caroline Copley; Editing by Noah Barkin and John Stonestreet

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