German inflation falls

Inflation revised downward after peaking in May

German inflation for July has been revised down to a rate of 2.6% year-on-year from the original 2.7% figure, the Federal Statistics Office said on Wednesday.

The fall in the consumer prices in Europe's largest economy will be welcomed by the European Central Bank (ECB), which forecast inflation would edge down from a peak in May.

But comments from German Chancellor, Gerhard Schroeder, on Wednesday that the government was lowering its growth forecast for 2001 to a range of 1.5% and 2% from a previous target of 2%, have added to fears of a major slowdown.

Those figures echo the downward revision of the growth indicator produced for the FT Deutschland and Les Echos on Wednesday, which predicted growth in the third quarter would fall to 1.4% year-on-year from a previously forecast 1.6%.

The euro fell to its lowest level in 10 days as the markets digested the news, hitting 0.8756 in early trade.

Mr Schroeder made his comments to Germany's Stern magazine, which will be published on Thursday, and also suggested he would not meet his promise of cutting the jobless total to 3.5 million by the election next year.

Inflation steady

Month-on-month, consumer prices in July were unchanged, after the downward revision of the preliminary figure by 0.1%.

In June, the consumer price inflation index rose 3.1% year-on-year after hitting 3.5% in May.

The inflation data follows unemployment figures for July on Tuesday which showed a seventh straight monthly rise to 9.3%, well above the EU and eurozone averages.

Falling inflation will come as a relief to German businesses and government who are expecting above-inflation wage demands in the next round of talks between unions and employers.

German wage negotiations are seen as a key indicator of future inflation in Europe, and are closely watched by monetary policymakers.

Pressure to cut

The ECB has not indicated whether the downtrend in inflation would leave room to cut interest rates in the near future.

Otmar Issing, the ECB's chief economist, has again endorsed the bank's position that eurozone interest rates were appropriate.

"It's definitely a statement that is valid, not just for now," he said in an interview with Germany's financial daily Boersen Zeitung.

The ECB has been under pressure to lower rates from 4.5% as euro zone growth slows, and will meet again on 30 August.