Annual inflation in Europe’s largest economy, Germany, unexpectedly slowed in October while Spanish consumer prices fell, suggesting the risk of deflation in the wider euro zone has not yet abated.

Data from the German statistics office showed preliminary inflation harmonised to compare with other European countries slowed to 0.7 per cent, the weakest reading since May. Economists polled by Reuters had forecast inflation would pick up to 0.9 per cent from 0.8 per cent in September.

The European Central Bank targets inflation of just under 2 pe rcent for the euro zone as a whole.

Spanish EU-harmonised consumer prices fell by 0.2 per cent on an annual basis in October, in line with forecasts and compared to a decline of 0.3 per cent in the month before.

A Reuters poll conducted ahead of the German and Spanish numbers found economists expected preliminary euro zone inflation, due on Friday, to edge up to 0.4 per cent from last month’s nearly five-year low of 0.3 per cent. The ECB considers anything below 1 percent to be in its “danger zone”.

Data earlier on Thursday showed German unemployment unexpectedly fell by 22,000 in October. A strong labour market, combined with moderate inflation and rising wages, is helping prop up domestic demand in Germany and the government is banking on this to support growth this year and help compensate for weak exports, the economy’s traditional growth driver.

Chancellor Angela Merkel said on Thursday that demand in Europe's biggest economy would remain strong.

“We’re seeing very good domestic demand in Germany and we’ve also done a lot to improve domestic demand,” she said after a meeting with Slovenia’s prime minister.

“For our neighbours, it’s often very important that Germany is a good customer with regards to domestic consumption and we can promise that this will be the case in future too despite the weaker economic data.”

Non-harmonised data showed German annual consumer price inflation steady at 0.8 per cent for a fourth month running.

Reuters