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German Inflation Rises but Remains Low

German Inflation Rises but Remains Low

07/11/2014

 By Todd Buell 

FRANKFURT--The rate of inflation in Germany picked up in June, data from the country's statistics office Destatis showed Friday, confirming the preliminary estimate published two weeks ago.

In harmonized European terms, prices increased by 0.4% on the month in June and were up 1.0% on the year. This followed a rise of only 0.6% on the year in May.

In national terms, the statistics office said that prices increased by 0.3% on the month in June and grew by 1.0% on the year. Energy prices were down by 0.3% on an annual basis, while the index excluding energy prices grew by 1.2% on the year.

The low inflation rate in one of Europe's strongest economies highlights the challenge that the European Central Bank faces in trying to revive inflationary pressure in the euro zone and support economic growth.

Inflation in the euro zone was only 0.5% in June, well below the ECB's medium-term target of just below 2%. Low inflation in Germany also makes it more difficult for struggling countries to bring prices and wages down to more competitive levels.

This is a problem that ECB Executive Board member Sabine Lautenschläger highlighted in a recent speech. Germany's "very low" inflation means that "prices and wages in the crisis countries therefore need to fall even more sharply in order to make up competitive disadvantages. This in turn makes economic recovery in these countries more difficult and may therefore exert further downward pressure on prices," she said.

Last month, the ECB cut all of its interest rates and introduced a negative rate on bank deposits parked at the ECB. It also announced targeted long-term loans to banks with conditions that the central bank hopes will encourage these to lend to the private sector.

Write to Todd Buell at todd.buell@wsj.com

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