German inflation inches up in January, state data suggest

[January 28, 2016]  BERLIN (Reuters) - German inflation inched up but remained low in January, preliminary state data indicated on Thursday, in news that could embolden proponents of further central bank stimulus.

A plunge in oil prices has raised questions about the European Central Bank's ability to pull very low inflation back up toward its 2 percent target for the whole euro zone.

In December, the central bank eased monetary policy further to fight low inflation but kept much of its powder dry, disappointing market hopes of more stimulus.

ECB President Mario Draghi has said the bank still has plenty of options left, suggesting it could act as early as March. A majority of economists in a Reuters poll said the ECB is likely to cut its deposit rate again in March.

The German data from several states including North Rhine-Westphalia and Bavaria, the two most populous, showed higher food costs lifted annual consumer prices slightly at the beginning of 2016.

The state readings ranged between 0.3 percent and 0.7 percent -- still far below the ECB's inflation target. The regional figures feed into nationwide data due at 1300 GMT (8 a.m. ET).

Capital Economics analyst Jennifer McKeown said the state numbers confirmed market expectations that the pan-German EU-harmonised consumer price inflation (HICP) would rise to 0.4 percent from 0.2 percent in December.

A Reuters consensus forecast of economists also predicted a pick-up to 0.4 percent. For the euro zone, economists polled by Reuters expect the January inflation rate, due out on Friday, to also have increased to 0.4 percent from 0.2 percent in December.

"Looking ahead, energy inflation should rise in the months ahead, perhaps adding 1 percentage point to the headline rate by the end of the year," McKeown said in reference to Germany.

Germany's robust labor market could lift wage growth and with it also core inflation, she noted, but added that she doubted price pressures would build too much, given signs that the economy might be slowing.

"And with fundamental deflationary pressures persisting elsewhere in the euro zone and inflation expectations worrying low, the ECB still has every reason to provide more policy support," McKeown added.

(Reporting by Michael Nienaber; Editing by Catherine Evans)

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