By Maria Martinez
BERLIN (Reuters) -German inflation fell slightly more than expected to 1.8% year- on-year in July, preliminary data from the federal statistics office showed on Thursday, another sign of easing price pressures in Europe’s biggest economy.
Analysts polled by Reuters had forecast EU-harmonised inflation decreasing slightly to 1.9% from 2.0% the previous month.
“Looking ahead, at least in the nearer term, German inflation is likely to fulfil the European Central Bank’s old definition of price stability and should remain ‘below but close to 2%’,” said Carsten Brzeski, global head of macro at ING.
The German data comes ahead of the euro zone inflation release on Friday. Inflation in the bloc is expected at 1.9% in July down from 2.0% in the previous month, according to economists polled by Reuters.
The ECB left interest rates unchanged last week and offered a modestly upbeat assessment of the euro zone economy, raising doubts among investors about further policy easing.
Germany’s core inflation rate, which excludes volatile food and energy prices, remained unchanged at 2.7% in July.
It remains to be seen how European and American companies will react to U.S. tariffs, Brzeski noted.
The U.S. struck a framework trade agreement with the EU on Sunday, imposing a 15% import tariff on most EU goods.
While one scenario could see prices falling in the euro zone due to overcapacity and weaker sales in the U.S., globally operating companies might actually try to increase prices in Europe in order to offset profit squeezing in the U.S., Brzeski said.
CHEAPER ENERGY, PRICIER FOOD
The German inflation data show that energy prices fell by 3.4% in July compared to the previous year, while food prices rose 2.2%.
“The strong euro compared to a year ago has a positive effect on goods prices, especially the costs of energy imports,” said Michael Heise, chief economist at HQ Trust.
Services inflation, which has been stubbornly high, fell to 3.1% in July from 3.3% in June.
“Price pressures in the services sector continue to ease slowly, probably because wage costs are rising more slowly and it is also becoming more difficult for companies to pass higher costs on to their customers,” said Ralph Solveen, senior economist at Commerzbank.
(Additional reporting by Miranda Murray and Reinhard Becker, Editing by Rachel More and Toby Chopra)
