German prices fall in September for first time in eight months

By Michelle Martin

BERLIN (Reuters) - German annual inflation turned negative in September for the first time in eight months and the weaker-than-expected reading could push the euro zone rate below zero, boosting the case for the European Central Bank to take more action.

Prices in Europe's largest economy, harmonized to compare with other European countries, fell by 0.2 percent after a 0.1 percent rise in August, preliminary data from the Federal Statistics Office showed on Tuesday.

Stefan Kipar, an economist at BayernLB, said he now expected the euro zone index to slip to -0.2 percent when the figure for the currency bloc is released on Wednesday.

The ECB is already ploughing a trillion euros into the euro zone financial system to try to push inflation up toward its target. However, inflation and economic growth remain stubbornly low, so markets are starting to price in an expansion of its quantitative easing (QE) program.

The German rate for September is the weakest since January. Other data on Tuesday showed Spanish prices falling at their fastest rate in seven months while Belgian inflation remained low, albeit above 1 percent for the first time since January 2014. All three readings were well below the ECB's euro zone target of just below 2 percent over the medium term.

"Combined with the unexpectedly weak Spanish inflation, it looks like euro zone inflation due tomorrow will also be low," said Ulrich Wortberg, an economist at Helaba bank.

"Against this background, it's unlikely that calls for an expansion of the (ECB's) bond-purchase program will quieten," he added.

Economists polled before Tuesday's data was published had expected the annual euro zone rate to slip to zero after a positive reading of 0.1 percent in August.

For Germany, they had forecast harmonized inflation slowing to zero. A breakdown of non-harmonized data showed energy prices dropped 9.3 percent on the year.

Sal Oppenheim economist Ulrike Kastens said the ECB would probably announce an extension of its QE program by the end of this year given that it had already cut its inflation forecasts earlier this month.

However, ECB Executive Board member Sabine Lautenschlaeger said on Monday that it was too early for the ECB to discuss taking further action as the euro zone economy was expected to recover modestly.

(Editing by Alison Williams and David Stamp)

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