German inflation eases to 2.0% in June, defying forecasts

By Maria Martinez

BERLIN (Reuters) -German inflation eased in June, preliminary data from the federal statistics office showed on Monday, despite forecasts suggesting a slight increase in price pressures in Europe's largest economy.

German inflation fell to 2.0% year on year. Analysts polled by Reuters had forecast EU-harmonised inflation increasing from the previous month to 2.2%.

Germany's core inflation rate, which excludes volatile food and energy prices, eased to 2.7% in June from 2.8% the previous month.

The German data comes ahead of the euro zone inflation release on Tuesday. Inflation in the bloc is expected at 2.0% in June, the European Central Bank's goal, up from 1.9% the previous month, according to economists polled by Reuters.

Data published on Friday showed that EU-harmonised inflation rose in France and Spain. Inflation was unchanged in Italy, data showed on Monday.

Overall, the figures add to the evidence that inflation in the euro zone has sustainably returned to the target, said Franziska Palmas, senior Europe economist at Capital Economics.

"Barring a renewed surge in energy prices we expect the headline rate to average 2.0% this year and the ECB to make one final rate cut in September," Palmas said.

The ECB cut interest rates at the beginning of June but hinted at a pause in its year-long easing cycle.

"The German figure signals to the ECB that it has done its job," said Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe, who forecast the inflation rate in Germany would remain at 2.0% or even dip lower in the coming months, "right where it is supposed to be."

CHEAPER ENERGY

Inflation data show that energy prices fell by 3.5% in June compared to the previous year.

While food prices rose 2.0%, that marked a significant decline from the 2.8% year-on-year increases recorded in May and April.

Services inflation, which has been stubbornly high, fell to 3.3% in June from 3.4% in the previous month.

"People may still complain about service prices, but due to the relief from energy prices, their still-high increase is hardly noticeable," said Krueger.

Despite the positive developments, Commerzbank's chief economist Joerg Kraemer warned that core inflation could remain higher than targeted "for longer than the ECB intends" due to the emerging economic recovery in Germany.

(Additional reporting by Klaus Lauer, Miranda Murray and Ludwig Burger, Editing by Rachel More and Joe Bavier)