German Inflation Slowing, Data Shows, Raising Heat on ECB

Inflation in Germany, Europe's biggest economy, it set to slow in May, data showed on Monday, turning up the pressure on the European Central Bank to act and avert deflation, analysts said.

According to closely watched state regional data published so far, German inflation looks set to have slowed in May from the 1.3 percent recorded in April.

Across the 18-nation eurozone there are signs of unusually low inflation, raising widespread concerns that the area could tip into deflation, meaning a fall in prices.

That can trigger a vicious spiral as businesses and households delay purchases believing prices will fall further, thus reducing demand, pushing up unemployment and causing another round of price falls, a process which can defy efforts of central banks to stimulate activity.

The preliminary German inflation data, calculated on the basis of cost-of-living statistics of six out of Germany's total 16 regional states, is scheduled for release later on Monday.

But of the statistics released so far, the trend seems to be a slowdown.

In the states of Baden-Wuerttemberg, Brandenburg and Hesse, the annual rate of inflation slowed to 0.7 percent.

In Bavaria it stood at 0.6 percent and in North-Rhine Westphalia it stood at 1.1 percent. 

The ECB defines price stability as annual inflation rates close to but just below 2.0 percent.

The data so far "suggest a sharp downward correction in headline inflation in May," said Newedge Strategy analyst Annalisa Piazza.

"Five out of six regional states released their preliminary data earlier this morning and the picture looks more depressed than anticipated," she said.

Jennifer McKeown at Capital Economics agreed. 

"May's sharp fall in German inflation will add to the pressure on the ECB to provide more policy support," she said. 

"The fact that inflation is this low in even the eurozone's strongest economy highlights the need for additional policy support," McKeown argued.

"Of course, it normally takes time for an economic recovery to feed through to higher inflation. But even the German recovery has so far been pretty moderate and survey indicators... suggest that it may have already peaked."

While the ECB was set to cut interest rates and unveil other easing measures at its policy meeting on Thursday, "we think much more will be needed to eradicate the risk of deflation," the expert concluded.

ECB watchers are predicting a cut in the central bank's key interest rates and possibly new measures to pump liquidity into the banking system.