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German inflation turns negative for first time since 2009

By Michelle Martin

BERLIN (Reuters) – Annual inflation in Germany turned negative in January for the first time since the height of the global financial crisis in 2009, suggesting the euro zone rate could drop further and possibly vindicating the ECB’s bond-buying programme.

Preliminary data on Thursday showed consumer prices in Europe’s largest economy, harmonised to compare with other European countries, dropped by 0.5 percent on the year in January after rising by 0.1 percent in December.

That undershot the consensus forecast in a Reuters poll for a 0.2 percent fall. It also falls far short of the European Central Bank’s target for close to but just under 2 percent over the medium term in the euro zone.

The fall in prices was largely driven by lower energy prices, while cheaper food also had an impact.

“Although the easing price pressures are largely due to low oil prices, the ECB nonetheless views this development with concern and should feel its latest decision to announce a bond buying programme was justified,” said Viola Julien, an economist at Helaba bank.

Last week the ECB announced a government bond-buying scheme to pump hundreds of billions of euros into the sagging euro zone economy, as it tries to push annual inflation in the currency union back up to its target.

Benoit Coeure, a member of the ECB’s Executive Board, said the ECB’s government bond-buying programme would only end once inflation was converging towards 2 percent.

Preliminary inflation data for the 19-nation euro zone is due on Friday and economists polled by Reuters before the German data was released expected it to show the cost of living in the single currency bloc dropping by 0.5 percent in January after falling by 0.2 percent in December – its first drop since 2009.

But Marco Wagner, economist at Commerzbank, said the German data suggested the euro zone rate could slip to -0.6 percent. He added that the ECB could significantly increase the volume of government debt it buys per month in the second half of the year because inflation and growth are likely to remain weak until then.

(Reporting by Michelle Martin; Editing by Stephen Brown)

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