German inflation eases to 3.1% in January

By Maria Martinez

BERLIN (Reuters) -German inflation eased slightly more than expected in January to 3.1%, preliminary data from the federal statistics office showed on Wednesday, helped by a drop in energy prices.

German consumer prices, harmonised to compare with other European Union countries, had risen by 3.8% year-on-year in December.

"The drop in German inflation will fuel speculation about an early European Central Bank rate cut, but underneath a favourable headline inflation there are still enough price pressures to worry about," ING's global head of macro Carsten Brzeski said.

Economists pay close attention to such data as Germany and France publish their numbers ahead of expected euro zone inflation statistics on Thursday.

French data showed EU-harmonised inflation falling to 3.4% in January from 4.1% in December.

"It's unclear if this suffices to see tomorrow's print for the whole block coming in below consensus expectation of 2.8%," said Mateusz Urban, senior economist at Oxford Economics, referring to German and French inflation data. "But if so, this would raise the odds of an April ECB cut."

Euro zone inflation is expected to dip to 2.8% in January from 2.9% a month earlier, according to economists polled by Reuters.

"I am now convinced that we have tamed that greedy beast," ECB policymaker Joachim Nagel said on Tuesday.

The ECB has raised interest rates by the most in the euro's history to bring inflation down from double digits. The bank is now expected to start cutting borrowing costs in the spring.

"There’s still one more inflation release to take into account before the ECB’s March meeting but the numbers for January make us more confident in our forecast that the first rate cut will be in April," Oxford Economics' chief Europe economist Andrew Kenningham said.

The driver of the decline in German inflation was energy prices, which were 2.8% lower than in the same month a year earlier, despite the end of a government measure capping energy prices and the introduction of a higher carbon price.

Core inflation, which excludes volatile food and energy prices, was at 3.4% In January, down from 3.5% in the previous month.

The sharp rise in wages will continue to push up prices for services and thus ensure that underlying inflation stabilises above the ECB's target of 2%, Commerzbank's economist Ralph Solveen said. He expects the first rate cut in June.

(Reporting by Bartosz Dabrowski and Maria Martinez, editing by Rachel More, Bernadette Baum and Emelia Sithole-Matarise)