Germany's annual rate of inflation is seen easing in February after consumer price data from two states showed falls in the cost of oil stemming from the strong euro had offset increased healthcare costs. The state statistics office of Saxony said on Tuesday prices rose by 0.2 percent month on month in February, mirroring an equivalent rise reported by the state of Bavaria on Monday, in line with analysts' forecasts for pan-German inflation. The rate of annual inflation in Saxony fell to 0.8 percent from 1.1 percent in January and in Bavaria to 1.0 percent from 1.4 percent. Prices in Germany rose by 0.1 percent in January month on month and by 1.2 percent year on year. "There is a euro effect on fuels which has even partly overcompensated for the price rise in crude oil," said Carsten Demski, an analyst at Bankgesellschaft Berlin.
The states' data showed a 20 percent year on year decline in the price of heating oil and cheaper fuel had cancelled out cost hikes in healthcare approaching 20 percent which arose from government reforms that took effect at the outset of 2004. The increased healthcare costs were probably responsible for the slight rise in the monthly rate of inflation, analysts said. Analysts polled by prior to the release of the data forecast consumer prices in Germany probably rose by 0.2 percent from a month ago and by 0.9 percent on the year. Demski said Germany's mild inflation meant there was scope for the European Central Bank to cut interest rates to boost demand, but did not expect action to be taken. Fortis Bank analyst Elwin de Groot said the ECB was only likely to cut interest rates if the euro reached a new high. "If the euro were to rise back to $1.30 that could make it easier for them to argue that the euro is putting downward pressure on prices and there will be a medium impact on price stability," said de Groot. After hitting a new high of $1.29 last week, the euro was trading at around $1.26 at 1200 GMT on Tuesday. Saxony and Bavaria were the first of six states to report data used to calculate an estimate for pan-German inflation which -- together with Italian cities data due on Thursday -- gives a first indication of price trends in the euro zone. Barclays Capital said the data backed their forecast for euro zone inflation to fall to 1.7 percent in February. The remaining German states of Brandenburg, North Rhine-Westphalia, Baden-Wuerttemberg and Hesse are expected to release their data on Tuesday and Wednesday.//