German inflation set to accelerate slightly in December

Reuters

* Data from states suggest acceleration in pan-German inflation

* CPI, due at 1300 GMT, seen rising to 1.4 pct in Dec

* Higher inflation in Germany could cause headache for ECB

By Sarah Marsh

BERLIN, Jan 6 (Reuters) - German annual inflation probably accelerated slightly in December albeit remaining below the European Central Bank's euro zone target, data from three federal states suggested on Monday.

Full data is due later in the day.

Inflation in Germany at the last reading was 1.3 percent annually, below the ECB's target of close to but just below two percent in 2013. But it is expected to accelerate this year which could cause a policy headache for the ECB and its one-size-fits-all interest rate policy.

Other euro zone countries are contending with slowing inflation.

Two federal state reports on Monday showed a slight increase while a third was unchanged.

In North Rhine-Westphalia (NRW), Germany's most populous state and traditionally a bellwether for the national data, the cost of living rose by 1.8 percent on the year in December, after gaining 1.6 percent in November.

In Hesse, home to Germany's financial capital Frankfurt, annual inflation accelerated to 1.2 percent in December from 1.1 percent in the previous month, while it held steady at 1.4 percent in Saxony.

Pan-German consumer price inflation is seen speeding up to 1.4 percent on the year in December from the 1.3 percent in November, according to the consensus forecast in a Reuters poll of economists. The data are due out at 1300 GMT.

As with bank lending and borrowing costs, inflation is highly fragmented across the euro zone.

Italy and Spain reported inflation rates of just 0.6 and 0.3 percent respectively last week while prices in Greece fell at a rate of 2.9 percent year-on-year at the last count.

The ECB cut rates to a record low after inflation in the euro zone eased to 0.7 percent in October. Several ECB policymakers have since then said there was no risk of deflation in the euro zone, but should it emerge they would still have options to address it.

But in Germany, which has outperformed peers throughout much of the currency bloc's crisis, inflation is seen accelerating over the coming years.

The government said in October it saw consumer prices rising 1.8 percent in 2014 after gaining 1.5 percent in 2013. Next year, inflation could accelerate to 2.5 percent, the IfW think tank warned, saying low ECB interest rates could cause the economy to "even overheat".

Markit's euro zone composite Purchasing Managers Index (PMI), released earlier on Monday, suggested however the gap between Germany and the rest of the currency bloc may be narrowing.

The survey showed businesses across the euro zone enjoyed a strong finish to 2013 as almost two years of job cuts came to an end last month. Moreover it suggested the region was on track to record modest economic growth in 2014.

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