German Inflation Probably Slowed as Euro Area Recovers

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

Germany’s consumer price index, calculated using a harmonized European Union method, rose 1.7 percent from a year earlier, compared with 1.9 percent in July, according to the median of 31 estimates in a Bloomberg News survey. Prices probably climbed 0.1 percent from June, the survey shows.

The 17-member euro area, Germany’s biggest trading partner, expanded 0.3 percent in the three months through June to snap six quarters of contraction. While Germany grew 0.7 percent, Italy and Spain remained in recession. Loans to companies and households in the region fell for a 15th month in July, extending the longest decline on record.

“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 in Dusseldorf. “The economy could well lose some momentum in the third quarter, but all in all performance is robust.”

German states are due to report their own inflation data throughout today before the Federal Statistics Office in Wiesbaden publishes national figures at 2 p.m.

Low Rates

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 euro-area 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, it predicted 2013 inflation at 1.4 percent, falling to 1.3 percent next year, and said the economy will contract 0.6 percent this year.

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 euro-area’s 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.

“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.”

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