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German inflation slows in November to hit ECB target

By Alexandra Hudson

BERLIN (Reuters) - German inflation eased slightly to 1.9 percent in November, bringing it into line with the European Central Bank's target ceiling for the first time since July and giving it some leeway to cut rates.

Economist said the fall in inflation, helped by lower fuel costs, might also help reassure the German public that the ECB's policies to tackle the euro zone's debt crisis, such as its controversial bond buying program, did not threaten price stability in Germany.

Whether the state of the euro zone economy will force the European Central Bank to cut its main interest rate to a new record low has economists more divided than ever, a Reuters poll showed on Wednesday.

"The German inflation figures are important for the ECB because they influence German public opinion, which the ECB will do everything within reason to keep on its side," said Christian Schulz of Berenberg Bank.

"German support for OMT (Outright Monetary Transactions) is key," said Schulz, referring to the ECB's potential bond-buying program. He noted that a short-term decrease in German prices would not have a big impact on the case for a rate cut as rising credit suggested a pickup further down the line.

Preliminary data from the Federal Statistics Office, closely watched for clues on overall euro zone inflation, showed annual inflation matched the consensus forecast in a Reuters poll of 32 analysts, falling 0.1 percentage points from October.

Lower heating oil, diesel and petrol costs helped bring down the index. Economists said German inflation would likely stay low over the next few months, as oil prices continue to decline.

According to a Reuters poll of 32 economists, prices had been expected to ease 0.1 percent on the month.

Prices in the six states used to calculate nationwide preliminary inflation weakened slightly on the month, while in three states annual inflation came in below 2.0 percent. The ECB targets inflation of below but close to 2.0 percent.

In North Rhine-Westphalia (NRW), Germany's most populous state and a bellwether for the national data, the price index slipped by 0.1 percent on the month and rose 1.9 percent on the year, the same rate as in October.

The price of heating oil fell 2.8 percent on the month, while fuels eased 1.0 percent. The prices of package holidays and hotel lodgings also fell.

"We expect the inflation rate will remain at roughly (its current level) in the coming months. Economic weakness, which in itself speaks for easing price pressure, should accompany a lower euro and in the medium term moderately rising raw material prices," said analyst Thilo Heidrich at Postbank.

WIDER IMPACT

Germany's inflation rate had remained above the ECB's euro area target for much of the past year as its economy continued to outperform European peers, fuelling robust wage rises.

The government and the country's central bank both hinted they would tolerate higher prices as long as euro-wide inflation remains under control. That could help ailing euro zone countries boost their competitiveness.

"At the moment, the biggest concern is not near term inflation but growth dynamics and whether recent deterioration in economic indicators will mean GDP (gross domestic product) will slow sharply," said Ben May at Capital Economics.

Flash euro zone inflation data is due on Friday. Annual inflation in the 17 states sharing the euro is expected to ease slightly to 2.4 percent from 2.5 percent in October, still above the ECB target.

"As inflation rates fall in other euro zone countries, stability in German inflation may be enough to slowly bring it to the top end of the range of euro zone inflation rates, reflecting the rebalancing in the currency area," Schulz said.

(Additional Reporting by Sarah Marsh; Reporting by Alexandra Hudson; editing by Gareth Jones and Ruth Pitchford)

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