Slowing inflation in Germany, Spain takes pressure off ECB

[BERLIN] German consumer inflation eased more than expected in May to fall well below the European Central Bank's two per cent target, data showed on Tuesday, taking some pressure off the ECB to wind down its monetary stimulus in the near term.

Spain also reported easing inflation. Together, the two suggest that May euro zone inflation to be reported on Wednesday will fall to at least the 1.5 per cent predicted in Reuters polls from the previous month's 1.9 per cent.

For Germany, the surprisingly weak figures suggested that price pressures remain relatively modest despite a continued upswing, booming labour market and the ECB's loose monetary policy.

With euro zone growth on its best run since the bloc's crisis took hold a decade ago, pressure from Germany and other countries has been mounting on the ECB to start planning an exit from its policy of aggressive bond purchases and sub-zero rates.

However, ECB President Mario Draghi said on Monday that euro zone growth may be improving but inflation remained subdued and still required substantial stimulus, tempering expectations for the central bank's June 8 policy meeting.

Euro zone inflation moves closely track those of Germany, its biggest contributor.

German consumer prices, harmonised to compare with other European countries (HICP), rose by 1.4 per cent on the year in May after inflation accelerated to two per cent in the previous month, the Federal Statistics Office said.

The reading was the lowest since November and came in below the Reuters consensus forecast of 1.6 per cent.

The German data followed Spanish figures that consumer prices rose by two per cent on the year, their slowest rate since December.

A breakdown of German non-harmonised data showed energy costs rose less sharply in May compared with the previous month given the fall in oil prices while food price inflation increased.

Services inflation also slowed, reflecting cheaper prices for leisure and package holidays as special factors related to the Easter holidays in April were reversed in May.

"The May drop in German headline inflation should be another reminder that the current cyclical upswing in the euro zone takes place without inflationary pressure," ING Bank economist Carsten Brzeski said, adding the data should take further pressure off the ECB to wind down its monetary stimulus.

"If even an economy which has just entered its ninth year of economic expansion and which has record high employment does not show any inflationary pressures, how could the euro zone as a whole do so any time soon?", Mr Brzeski added.

The German government has said it expected the national inflation index to jump to 1.8 per cent in 2017 after 0.5 per cent in the previous year. It predicts price pressures to slow again to 1.6 per cent in 2018, well below the official ECB target.

REUTERS