Lower German inflation gives European Central Bank (ECB) some breathing space

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German food price rises have slowed down (Source: Getty)

Inflation in Germany has dipped sharply to fall back below two per cent, lowering the pressure on the European Central Bank (ECB) to tighten monetary policy.

Consumer prices rose at an annual rate of 1.6 per cent in March, down from 2.2 per cent in the previous month, according to the German Federal Statistics Office.

The slowdown in price increases came as the effects of surging oil and food prices dissipated.

Read more: Hold: The ECB keeps interest rates and QE purchases steady

The euro fell in value against the US dollar to hit lows of €1.0726 at the time of publication as traders anticipated a longer path for loose money supply.

The fall in inflation surprised economists who had predicted the fall to be less dramatic, reaching around 1.8 per cent.

Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said: “Inflation pressures in Germany eased significantly at the end of the first quarter, due to weakness in both headline and core.”

“Food inflation fell back due to a diminished boost from the fresh food supply shock in the beginning of the first quarter, which was driven by cold weather in southern Europe. Energy inflation dipped as base effects from last year’s oil price volatility faded.”

Read more: Higher inflation boosts Europe hawks' case for tightening

The slower pace of price increases in Germany, by far the biggest economy in the Eurozone, suggests inflation across the currency union will be significantly lower when it is reported tomorrow.

Eurozone inflation reached two per cent in February. The ECB is mandated to maintain inflation “near but below” two per cent. However, the ECB has not moved to raise interest rates or taper its quantitative easing purchases of bonds.

It said the rise of inflation above its target was not sustainable, and that it would “look through” price increases measured in the headline inflation rate if they were not reflected in the core inflation measure. Core inflation ignores the effects of more volatile components of the price indices, including food and fuel.

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