Annual inflation in Europe’s largest economy fell to its lowest level in nearly five years in November, suggesting the risk of deflation in the wider euro zone has not yet abated.

Preliminary figures from Germany’s Statistics Office showed inflation harmonised to compare with other European countries dropped to 0.5 per cent from 0.7 per cent in October, undershooting a consensus forecast of 0.6 per cent. On the month, the cost of living was unchanged using this measure.

Non-harmonised data showed consumer prices increased by 0.6 per cent on the year and remained unchanged on the month. The final price data is due to be released on December 11th.

"Looking ahead, the recent drop in energy prices - if sustained and if not offset by strong currency weakening - could push German headline inflation further down," ING Bank analyst Carsten Brzeski said.

“For next week’s ECB meeting, today’s German inflation data could be the prelude of another downward revision of the ECB’s inflation forecasts.”

Preliminary euro zone inflation data, due on Friday, is expected to show the annual rate slowing to 0.3 per cent from 0.4 per cent, according to a Reuters poll. The ECB considers anything below 1 per cent to be in its deflation “danger zone”.

"With inflation set to remain far below target in the euro-zone's largest and arguably strongest economy, the ECB will remain under intense pressure to provide more policy support," said Jennifer McKeown of Capital Economics.

The ECB has started buying covered bonds and asset-backed securities to revive the euro zone economy and keep deflation at bay. It may decide as soon as the first quarter of next year whether to begin buying sovereign bonds.

In Germany, record employment, rising wages and low interest rates are helping to prop up the economy, which has suffered from uncertainty over the West's confrontation with Russia over Ukraine and weakness in some euro zone partners.

The unemployment rate touched a record low of 6.6 percent in November, seasonally adjusted data from the Federal Labour Office showed earlier on Thursday.

In another positive sign, consumer morale improved for a second month heading into December, suggesting a brighter ending to the year for Europe’s biggest economy after it narrowly avoided a recession in the third quarter.

Reuters