German Inflation Slows as Prices Seen Contained During Recovery

German inflation slowed in August, signaling price pressures remain contained after Europe’s largest economy led the euro area out of its longest-ever recession.

The nation’s consumer price index, calculated using a harmonized European Union method, rose 1.6 percent from a year earlier, compared with 1.9 percent in July, the Federal Statistics Office in Wiesbaden said today. Economists in a Bloomberg News survey forecast 1.7 percent. Prices were unchanged from July.

While Germany’s economy grew 0.7 percent last quarter and the euro area returned to growth, Italy and Spain remained in recession. Loans to companies and households in the currency bloc, Germany’s biggest trading partner, fell for a 15th month in July, and German unemployment unexpectedly rose in August.

“The European economy is still relatively weak, so there are certainly no grounds for inflation worries,” said Lothar Hessler, an economist at HSBC Trinkaus & Burkhardt AG (TUB) in Dusseldorf, before the report. “The economy could well lose some momentum in the third quarter, but all in all performance is robust.”

Jobless Gain

The Bundesbank forecasts the German economy will grow 0.3 percent this year and predicts average inflation of 1.6 percent, dropping to 1.5 percent in 2014. Prices for imported goods fell 2.6 percent in July from a year earlier, according to government data yesterday. Prices for imported energy slid 4.1 percent.

The country’s unemployment unexpectedly gained in August for the first time in three months in a sign of a slowdown. The number of people out of work increased by a seasonally adjusted 7,000 to 2.95 million, the Nuremberg-based Federal Labor Agency said today. Economists predicted a decline by 5,000, according to a Bloomberg News survey. The adjusted jobless rate stayed at 6.8 percent, near a two-decade low.

The euro-area’s inflation rate remained at 1.6 percent in July, a report published by the European Union’s statistics office showed on Aug. 16. The European Central Bank will present new growth and inflation forecasts on Sept. 5.

In June, the ECB predicted 2013 inflation at 1.4 percent, falling to 1.3 percent next year, and said GDP will contract 0.6 percent this year. The currency bloc’s economy shrank for the six quarters through March before growing 0.3 percent in the three months through June.

Rate Pledge

ECB President Mario Draghi, reacting to concern that a removal of monetary stimulus in the U.S. would push up market interest rates and derail the recovery, pledged in July to keep borrowing costs at the current level or lower for “an extended period.” He said the reason for taking what he called the “unprecedented” step was the ECB’s expectation that the subdued outlook for inflation will extend into the medium-term amid broad-based weakness in the economy.

ECB Executive Board member Joerg Asmussen said on Aug. 27 that even though the central bank has pledged low rates for the foreseeable future, it’s aware of the risks inherent in keeping them there for too long. The ECB’s benchmark stands at 0.5 percent, a record low.

Governing Council member Ewald Nowotny said today that the ECB’s forward guidance depends on inflation expectations and that it will end at some point. The central bank’s commitment to keep rates low for a prolonged time “won’t be in place forever,” he said in Alpbach, Austria.

“Inflation in the euro area will remain moderate for quite some time,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “That said, the rate of core inflation in Germany is rising faster than the European average, and interest rates aren’t likely to rise any time soon. We should be keeping an eye on that.”

To contact the reporter on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Fergal O’Brien at fobrien@bloomberg.net

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