German Inflation Slowed in March as Oil Increased at Weaker Pace

Inflation in Germany, Europe’s largest economy, slowed in March as energy prices increased at a weaker pace than a year ago.

Inflation, calculated using a harmonized European Union method, eased to 2.3 percent from 2.5 percent in February, the Federal Statistics Office in Wiesbaden said today. That’s in line with the median of 24 estimates in a Bloomberg News survey. In the month, prices rose 0.4 percent.

The euro region’s economic slump and budget cuts from Spain to Ireland have left companies with less room to pass on higher costs even with tensions in the Middle East driving up crude oil prices by 7.9 percent over the past two months. Still, European Central Bank President Mario Draghi said earlier this month that short-term risks to price stability have moved to the upside.

“Inflation risks in Germany are higher than in the euro area,” said Christian Melzer, an economist at Dekabank in Frankfurt. “Given the weak economic outlook and high unemployment in the single-currency region, there’s no risk of second-round effects. In Germany, that’s a little different.”

In Germany, IG Metall, Europe’s biggest trade union representing 3.6 million workers, is demanding a 6.5 percent wage increase as the economy outperforms its euro-area partners and unemployment holds at the lowest in more than two decades.

Energy Prices

The inflation rate eased in all six German states that contributed data to today’s report as price increases for products such as fuel or heating oil were weaker than in March last year. In Saxony, energy prices rose 1.8 percent from February and 6.7 percent from a year earlier, while in Baden-Wuerttemberg fuel cost 4 percent more in the month and 7.2 percent more in the year. In Hesse, heating oil prices rose 0.3 percent from February and 7.9 percent from a year earlier.

In March 2011, the cost of energy rose 2.9 percent in the month and 10.5 percent in the year at the national level, with heating oil prices up 8.1 percent and 32.8 percent respectively.

German non-harmonized inflation slowed to 2.1 percent from 2.3 percent, with prices rising 0.3 percent from February, the statistics office said.

“German inflation could fall below the European Central Bank’s 2 percent limit as soon as April,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. However, “economic performance and wage demands are decisive factors that risk fueling German inflation.”

‘Clear Mandate’

Bundesbank President Jens Weidmann suggested on March 13 the ECB could raise interest rates if inflation pressures increased.

“We have a clear mandate and a clear hierarchy of our goals, and the first is to maintain price stability,” he said in an interview. “We’re determined to do so. You can be assured we will react if inflation pressures arise.”

Euro-area inflation will slow to 2.5 percent in March from 2.7 percent in February, the median of 39 forecasts in a Bloomberg News survey shows. Eurostat, the EU’s statistics office, will publish that data on March 30.

The ECB predicts inflation will remain above 2 percent for the rest of the year, even after at least six of the 17 euro nations entered recessions. The region’s economy will contract 0.3 percent this year before returning to growth in 2013, the European Commission projects.

The German economy will grow 0.6 percent this year, while those of Italy and Spain are forecast to contract 1.3 percent and 1 percent respectively, the Brussels-based commission said on Feb. 23.

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