Easing German inflation still above ECB target

Wed Sep 26, 2012 10:42am EDT
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By Sarah Marsh

BERLIN (Reuters) - Inflation in the euro zone's largest economy of Germany slowed in September, but not by enough to support the case for a recession-fighting interest rate cut by the European Central Bank.

Preliminary data showed annual inflation slowed to two percent on seasonal factors such as reduced food and travel costs, matching a Reuters consensus forecast. The measure fell from 2.1 percent in August when it jumped on energy prices.

The European Central Bank aims to keep inflation close to, but just under, 2 percent in the euro zone as a whole.

"Over the past two to three months, there has not been a trend of price easing in Germany which would catch anybody's attention and influence the debate at the ECB over rates," said Holger Schmieding at Berenberg Bank.

"The Bundesbank would still say it is at 2 percent, which is the upper limit of where it is allowed to be, so nobody will use it as an argument for a rate cut."

For much of last year Germany's inflation rate remained above 2.0 percent, as its economy outperformed that of its peers, fuelling robust wage rises across many sectors.

This posed a dilemma for the ECB, struggling to balance monetary policy for Europe's largest economy and powerhouse with policy for the struggling southern periphery.

Germany is now beginning to feel more of the pain from the euro zone crisis as weaker demand in austerity-hit countries weighs on exports. A survey on Monday showed business sentiment dropped for a fifth straight month in September, raising fears of a recession.   Continued...