Strong German, Spanish inflation give ECB food for thought

By Michael Nienaber and Paul Day BERLIN/MADRID (Reuters) - German and Spanish consumer prices rose more than expected in June, giving the European Central Bank fresh food for thought as euro zone inflation moves closer to its target and markets price in a tightening shift in monetary policy. The surprisingly strong inflation figures released on Thursday come only days after ECB head Mario Draghi suggested the central bank's asset-purchase programme would become less accommodative going into 2018 after regional growth has gained pace and inflation trends returned following a period of falling prices. German consumer prices, harmonised to compare with other European countries, rose by 1.5 percent on the year after an increase of 1.4 percent in the previous month, the Federal Statistics Office said. On the month, prices rose 0.2 percent. Both figures came in stronger than expected, with a Reuters poll having pointed to an increase of 1.3 percent on the year and an unchanged reading on the month. In Spain, EU-harmonised consumer prices rose by 1.6 percent year-on-year in June, flash data from the National Statistics Institute (INE) showed. This compared with a Reuters poll of 1.5 percent and previous reading of 2.0 percent. A breakdown of the German non-harmonised data showed energy costs were unchanged in June while food and services inflation clearly picked up, suggesting that Germany's economic upswing is slowly pushing up underlying price pressures. "The domestic economy is buzzing. It is quite possible that this will soon be reflected in rising wages and salaries," KfW Bank economist Joerg Zeuner said. "This is likely to boost the economy and inflation. It would open up new opportunities for the ECB to normalise its monetary policy," Zeuner added. With its 2.3-trillion-euro asset buys running until the end of the year, the ECB will have to decide in the third quarter whether to extend or wind down the purchases, reconciling an apparent contradiction between healthy growth and still modest inflation. The euro zone will publish preliminary inflation data on Friday, with the annual rate expected to be 1.2 percent according to Reuters polls. Inflation has undershot the ECB's target of almost 2 percent for more than four years but Draghi has hinted at a willingness to look through some of the factors holding down price growth, mainly energy prices. (Reporting by Michael Nienaber in Berlin and Paul Day in Madrid; Editing by Joseph Nasr/Jeremy Gaunt)