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Germany still lags euro zone inflation cycle

FRANKFURT: German retail sales for December fell short of expectations while inflation for January was revised down to 1.6 percent, indicating Germany still lags the euro zone's inflation cycle, analysts said.

Retail sales rose by a price-adjusted 0.8 percent in December year-on-year, the Federal Statistics Office said on Friday.

"The retail sales were disappointing, we had hoped for a boost from Christmas sales," said Manuela Preuschl, an economist at Deutsche Bank Global Markets Research.

"But it's not a good indicator for private consumption which we think did reasonably well in the fourth quarter." Preuschl estimated that private consumer spending rose 2.0 percent year-on-year in the final quarter of 1999.

Retail sales reflect only about a third of German private consumption and the data tend to be volatile.

The figures exclude car sales and holiday spending which make up a large chunk of outlays for the globetrotting Germans.

The Office also said it had revised down German January inflation by 0.1 percentage point from preliminary data, lowering January inflation to 1.6 percent year-on-year and 0.3 percent month-on-month respectively.

At 1.6 percent, the inflation rate was Germany's highest since December 1997, when it was 2.0 percent, the Office said.

The increase in inflation from December's rate of 1.2 percent was explained by an energy tax increase which added 0.2 percentage point to the year-on-year and month-on-month rates, the Office said.

Steep increases in the price of heating oil and fuel were also to blame, it said. Excluding oil, the consumer price index was up 0.2 percent month-on-month and 0.7 percent year-on-year.

Economists said the data showed Germany was unlikely to breach the ECB's two percent ceiling for euro zone inflation.

"Germany is still clearly below the level of Euroland inflation," Preuschl said, predicting euro inflation would rise to 1.8 or 1.9 percent in January from December's 1.7 percent.

Euro zone inflation is widely expected to hit two percent in February, driven by statistical effects and the weakness of the euro.

"If euro zone inflation doesn't start to come down again in March we will start to hear more hawkish comments from the ECB," said Lothar Hessler at HSBC Trinkaus & Burkhardt.

Duisenberg said in a German newspaper interview published on Friday that the euro's recent fall had helped prompt the ECB to raise rates early - it raised the cost of borrowing by 25 basis points last week, lifting the main refinancing rate to 3.25 percent - but that a hike would have come anyway.

Separately, German motor industry federation VDA said it expected the automotive market to cool of slightly in 2000 compared with the previous year, but to remain at a high level.-Reuters