German inflation picks up more than forecast in July

By Joseph Nasr

BERLIN (Reuters) – German consumer price inflation grew more than forecast in July but remained weak, preliminary data showed on Thursday, highlighting the limited effect of the European Central Bank’s ultra-loose monetary policy.

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.

German annual inflation data, published by the Federal Statistics Office on Thursday, showed consumer prices — harmonized to compare with other European countries (HICP) — rose by 0.4 percent after a 0.2 percent increase in June.

The reading was stronger than the mean forecast in a Reuters poll for a rise of 0.3 percent.

A breakdown of non-harmonised inflation data showed that energy remained the main drag. Prices for food rose faster than they did the month before.

The German data is a further sign that the ECB may take more action in September, Capital Economics analyst Jennifer McKeown said.

“While German inflation may reach the ECB’s 2 percent price stability ceiling in the coming months, it is unlikely to stay there for long,” McKeown said.

“And with price pressures far weaker elsewhere in the region, the bank has reason to increase its policy support,” she said. “We see it cutting its deposit rate further into negative territory and raising the pace of its asset purchases in September.”

The central bank kept interest rates unchanged last week but left the door open to more policy stimulus, citing uncertainty and risks to the economic outlook and signaling readiness to act.

ECB President Mario Draghi argued that Britain’s decision to leave the European Union and weak emerging market growth both dampen the euro zone’s own outlook.

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 – the same rate as the previous month.

“Despite a healthy (German) economy and stable consumer demand, inflation rates will remain low and the whole euro zone must anticipate a lasting failure to achieve its inflation target,” said Sal. Oppenheim economist Ulrike Kastens.

(Reporting by Joseph Nasr; additional reporting by Michelle Martin)