Euro zone inflation risks have risen and weaker economic growth will not automatically offset them, Bundesbank said in a report released yesterday.
Inflation expectations in the euro zone have also remained above levels consistent with mid-term price stability, the German central bank added in its August monthly bulletin.
"Risks to medium-term price stability in the euro area have, in conjunction with continued strong external price pressures, increased further," the report said.
"The fact that weaker growth rates are expected for the economy in the near future does not mean that enough of a countervailing effect for stability policy is taking shape and automatically offsetting the pressure on prices," it added.
The European Central Bank left interest rates unchanged at 4.25 per cent earlier this month and insisted inflation was still its key fear even though risks to growth were taking hold.
Bundesbank said inflation in Germany could ease slightly, with prices for fuel, heating oil and agricultural products expected to fall. But inflation would probably remain significantly above two per cent, it added. German annual inflation registered 3.3 per cent in July.
A sharp rise in energy costs had dented real incomes and reduced consumers' willingness to spend, weakening demand both in Germany and in key export markets, the bank said.
Separately, the DIW economic research institute said German consumer spending would probably get a boost in the coming months as inflationary pressures ease in the second half of 2008.
The economy would probably grow by about 0.1 per cent in the third quarter after contracting by 0.5 per cent in the April-June period, the Berlin-based think tank said in its monthly gauge of Germany's economic situation.
Bundesbank said the country had not lost the resilience to economic cycles that it had gained in recent years.