German inflation slows in February, regional data suggests

Inflation in six German states slowed on the year in February, regional data showed on Tuesday, suggesting that price pressures in Europe’s largest economy remain muted despite a robust upswing, rising wages and unprecedented monetary stimulus.

The data highlights the uphill battle of the European Central Bank in getting inflation in the euro zone as a whole close to its price stability target of just below 2 percent.

In Germany’s most populous state, North Rhine-Westphalia, annual inflation slowed to 1.3 percent in February from 1.5 percent in the previous month, the data showed. It also fell in Baden-Wuerttemberg, Bavaria, Hesse, Saxony and Brandenburg.

The state readings, which are not harmonised to compare with other euro zone countries, will feed into nationwide inflation data due at 1300 GMT.

Jessica Hinds of London-based Capital Economics said the states’ inflation data pointed to a slightly sharper fall in German HICP inflation in February than expected.

“This suggests that inflation is set to remain subdued,” she added. “Accordingly, while we think strong economic growth will encourage the ECB to remove the loosening bias from its forward guidance next month, we expect it to stress that interest rate hikes are a long way off.”

A Reuters poll conducted before the release of the regional data suggested that Germany’s harmonised consumer price inflation rate would fall to 1.3 percent in February from 1.4 percent in the previous month. This would be the lowest level since November 2016 when inflation stood at 0.7 percent.

The German government expects national consumer price inflation (CPI) to slow to 1.7 percent this year from 1.8 percent in 2017 despite the booming economy.

In the euro zone as a whole, inflation is now comfortably above 1 percent but it is not expected to hit the ECB’s target of just under 2 percent for years to come.

The euro zone will publish preliminary inflation data on Wednesday, with the annual rate expected to edge down to 1.2 percent in February from 1.3 percent in January according to Reuters polls.

On Monday, ECB President Mario Draghi said that the slack in the euro zone economy may be bigger than previously estimated and this could slow the rise of inflation temporarily.

This was countered on Tuesday by Bundesbank President Jens Weidmann, a persistent critic of the ECB’s ultra-loose policies, who said rapid and broad-based economic growth in the euro zone would ensure that inflation continues to rise so the ECB should gradually reduce stimulus.
Source: Reuters (Reporting by Michael Nienaber; Editing by Catherine Evans)