German inflation remains weak despite rise in July, state data suggest

Economy

German consumer prices look set to rise further in July but remain weak, regional data indicated on Thursday, highlighting the limitations of the European Central Bank's ultra-loose monetary policy.

The German data is a further sign that the ECB may beef up its monetary stimulus and cut its deposit rate further into negative territory, Capital Economics analyst Jennifer McKeown said. The central bank is struggling to push the inflation rate close to it target of just below 2 per cent.

The euro zone has seen little or no inflation for the past year, mainly because oil prices have plunged. The ECB expects inflation across the bloc to remain below its target of just under 2 percent for some years.

Data from five German states, including the most populous state of North Rhine-Westphalia, showed annual inflation picking up in July.

The state readings, which are not harmonized to compare with other euro zone countries, will feed into nationwide inflation data due at 1200 GMT.

The state data suggested that German EU-harmonized consumer prices rose by 0.3 percent on the year, McKeown said.

That would be in line with the Reuters consensus forecast for harmonized consumer price inflation to accelerate to 0.3 percent after a reading of 0.2 percent in June.

For the euro zone, economists polled by Reuters expect the inflation rate, due to be published on Friday, to show a 0.1 annual percent rise for July, unchanged from the previous month.

"German headline inflation should continue to rise as the drag from the energy component eases. The core rate might increase slightly from its recent slow pace too," McKeown said.

"But even in Germany, we doubt that inflation will reach the ECB's near 2 percent target on a sustained basis," she said. "And with price pressures weaker elsewhere in the region, the bank has reason to increase its policy support.

"We still see it cutting its deposit rate further into negative territory and raising the pace of its asset purchases in September."

Sourse Reuters