German inflation weaker than expected in March, state data suggest

BERLIN (Reuters) - German consumer inflation probably slowed more than expected in March due to cheaper energy and food prices, falling back below the European Central Bank's target of just under 2 percent, regional data suggested on Thursday.

The surprisingly weak figures from several German states hinted that price pressures in Europe's biggest economy still remain relatively modest despite its continued upswing, booming labor market and the ECB's loose monetary policy.

The German data follows Spanish price figures that also showed consumer inflation eased sharply in March as fuel and power prices fell, feeding into the debate about the euro zone's monetary policy outlook.

In Germany's most populous state, North Rhine-Westphalia, annual inflation slowed to 1.7 percent from 2.3 percent in February. It also fell back to 1.7 percent in Hesse and Bavaria. In the eastern state of Brandenburg, it dropped to 1.4 percent while it stood at 1.8 percent in Saxony.

The state readings, which are not harmonized to compare with other euro zone countries, will feed into nationwide inflation data due at 1200 GMT (8 a.m. ET).

A Reuters poll conducted before the release of the regional data suggested overall consumer price inflation fell to 1.9 percent in March from 2.2 percent in February, which was the highest rate since August 2012.

Capital Economics analyst Jennifer McKeown said the state readings suggested that German inflation fell more sharply than expected in March to some 1.7 percent. She added that underlying price pressures would remain subdued.

"The labor market is in good health, but it has been for a long time and there are still few signs of strong upward pressure on wage growth," McKeown said.

Since core price pressures are much weaker elsewhere in the euro zone, the ECB is likely to maintain its view that the economic recovery has not put inflation on course to meet its medium-term goal, she added.

"We see it implementing its asset purchases as planned and keeping interest rates on hold for a long time to come."

The inflation rate for the entire euro zone, due on Friday, is expected to have fallen to 1.8 percent in March from 2.0 percent in February, economists polled by Reuters said.

The ECB has slashed interest rates and adopted a bond-buying program worth 2.3 trillion euros ($2.47 trillion) to pump money into the region's economy.

The central bank has said it needs to see if inflation rises at the start of the year are sustainable in the medium term before considering changing policies which pump billions of euros into the euro zone economy through asset purchases.

(Reporting by Michael Nienaber; Editing by Catherine Evans)

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