Annual inflation in Germany accelerated to 2 per cent in August due to higher energy prices, preliminary data showed yesterday, posing a dilemma for the European Central Bank as it weighs an interest rate cut to help struggling southern states.

The annual figure came in well above the consensus forecast. The ECB targets inflation close to but just under 2 per cent in the euro zone as a whole. The pan-German inflation rate was last at 2 per cent in April.

“The ECB is running a very accommodative, stimulating monetary policy with interest rates being very low,” said Christian Schulz, senior economist at Berenberg Bank. “In the German situation, these rates might be too low.

“For us this just confirms a rate cut is very unlikely now – what is much more likely is that the ECB will do everything it can to re-establish the transmission of monetary policy.”

The pick-up in German inflation is unlikely to worry the government in Berlin or the Bundesbank, both of which have hinted they would tolerate higher prices as long as euro zone inflation remained under control.

– (Reuters)