Germany to slide into deflation in January, state data suggests

BERLIN (Reuters) - Annual inflation in Europe's largest economy looks set to turn negative in January for the first time since the height of the global financial crisis in 2009, according to data from some German states on Thursday.

Data from four federal states showed yearly inflation turning negative in January and therefore well below the European Central Bank's target for close to but just under 2 percent over the medium term in the euro zone.

In North Rhine-Westphalia (NRW), Germany's most populous state and a bellwether for the national rate, consumer prices fell at their sharpest monthly rate since 1950. On the year, the cost of living in NRW fell by 0.4 percent after rising by 0.1 percent in December.

A Reuters poll conducted before the state data was published found economists expected consumer prices to drop by 0.2 percent on an annual basis when harmonised to compare with other European countries (HICP) - the ECB's preferred measure - and by 0.1 percent on the national measure.

Jennifer McKeown, senior European economist at Capital Economics, said the data suggested Germany would fall into deflation in January.

"Data from the German states suggest that national HICP inflation dropped below zero in January for the first time since October 2009, with a more negative reading than had been expected," she said.

The fall in prices was largely driven by energy, while cheaper food also had an impact.

Christian Schulz, senior economist at Berenberg Bank, said there was a risk that the national inflation data came in lower than the consensus forecast. It should not have any major impact on European Central Bank policy because it has already announced its quantitative easing programme, he added.

"Many of these items are temporary and things which don't reflect domestic inflationary pressures but rather supply issues so that's actually positive for growth - it helps consumers save money on these items and spend more on others," he said.

Preliminary euro zone inflation data, due out on Friday, is expected to come in at -0.5 percent after -0.2 percent in December. The euro zone reading turned negative at the end of last year for the first time since October 2009.

National German inflation data is due to be published at 1300 GMT on Thursday.

(Reporting by Michelle Martin; Editing by Stephen Brown)

By Michelle Martin