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Slower German inflation seen raising pressure on ECB to act

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[June 02, 2014]  By Michelle Martin

BERLIN (Reuters) - Annual inflation in Europe's largest economy likely slowed in May, data from German states suggested on Monday, probably pushing down the broader euro zone rate and raising pressure on the European Central Bank to act when it meets this week.

Data from six states showed annual inflation rates ranging from 0.6 percent to 1.1 percent. Economists had forecast that the preliminary national rate, due out at 2 p.m. (8 a.m. EDT), would show consumer prices climbed by 1.1 percent on the year.

In North Rhine-Westphalia (NRW), Germany's most populous state and traditionally a bellwether for the national data, consumer prices increased by 1.1. percent on the year, their lowest annual rate since Sept. 2010.

But ING economist Carsten Brzeski said data from some other states showing weaker inflation would probably push the national figure down below 1 percent.

"It shows euro zone inflation could be weaker than expected, increasing pressure on the ECB to act on Thursday," he said.

Euro zone inflation stood at 0.7 percent in April - well below the ECB target of close to but just below 2 percent - and a Reuters poll shows economists expect data due out on Tuesday to show it held steady in May.

Brzeski said he expected the central bank to cuts its deposit rate into negative territory at its June meeting and continue to offer banks unlimited access to its funding until the end of 2015 or mid-2016.

Last week ECB Vice President Vitor Constancio said the ECB was not complacent about the risks from a protracted period of low inflation and would act if necessary while Governing Council member Ignazio Visco said excessively low inflation in the euro zone should be dealt with as firmly as high inflation.

Jennifer McKeown, senior European economist at Capital Economics, said a weighted average of data from six German states suggested the harmonized index of consumer prices (HICP), the measure used by the ECB, probably fell to a four-year low of 0.8 percent or even lower in May from 1.1 percent in April.

That would be far lower than expected - economists polled by Reuters had forecast that consumer prices harmonized to compare with other European Union countries would rise by 1.0 percent on the year.

(Reporting by Michelle Martin; Editing by Noah Barkin)

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