German inflation to hit 4-year high in January, state data suggests

By Michael Nienaber

BERLIN (Reuters) - German inflation is likely to have picked up further in January, surpassing the European Central Bank's official price stability target of just under 2 percent for the first time in more than four years, regional data suggested on Monday.

The strong inflation data, published by several German states, is expected to fuel the political debate in Europe's biggest economy about an end to the ECB's loose monetary policy.

Preliminary data from several states showed that consumer price inflation accelerated in most German regions. In the most populous state of North Rhine-Westphalia, for example, annual inflation rose to 2.1 percent after 1.9 percent in December.

Consumer prices increased by 2.3 percent in Saxony and by 2.4 percent in Hesse whereas the annual inflation rate remained unchanged at 1.7 percent in both Brandenburg and Bavaria.

The state readings, which are not harmonised to compare with other euro zone countries, will feed into nationwide inflation data for Europe's largest economy due out at 1300 GMT.

A Reuters poll suggests overall consumer price inflation rose to 2.0 percent in January after 1.7 percent in December, the highest rate since December 2012.

Helaba economist Stefan Muetze said, however, he now expects the EU-harmonised inflation rate (HICP) to come in a tick stronger at around 2.1 percent.

For the euro zone as a whole, economists polled by Reuters expect the inflation rate, due on Tuesday, to rise to 1.5 percent in January after 1.1 percent in December.

Given that transportation costs soared in most German states, Jennifer McKeown of Capital economics said that there were first signs of rising price pressures also in the core components of the inflation rate.

But she added that underlying price pressures, especially in the services sector, were still relatively subdued.

"Accordingly, concerns about rising inflationary pressures in Germany are unlikely to prevent the ECB from implementing this year's asset purchases as planned," McKeown said.

Helaba's Muetze agreed, saying: "(ECB President Mario) Draghi will keep a steady hand. The latest German data will not make him change course all of a sudden."

The central bank of the 19-member single currency bloc has unleashed unprecedented stimulus in recent years, cutting interest rates aggressively and pumping more than a trillion euros into the economy through asset purchases.

A sustained rebound in German inflation would give Bundesbank president and ECB rate setter Jens Weidmann more scope to argue for a reduction in the ECB's bond-buying programme, a scheme that he has often criticised.

(Editing by Jeremy Gaunt.)