3rd UPDATE: German States' July CPI Turn Negative On Yr

FRANKFURT -- German consumer prices are likely to have fallen on the year for the first time in over 20 years in July, based on data published Wednesday by five of the country's largest federal states.

The data may usher in what European Central Bank officials expect to be a brief period of deflation across the euro zone in general.

They also suggest strongly that prices fell more sharply in July than the market expected, after surprising to the upside in June. Analysts polled by Dow Jones Newswires had expected prices to have risen by 0.1% on the month, and to have fallen 0.3% from a year earlier.

Prices fell from June in all of the early-reporting states in western Germany: by 0.2% in North Rhine Westphalia and Hesse, and by 0.1% in Baden-Wuerttemberg. In all three cases, the annual inflation rate had not been negative since 1987, and ranged from -0.6% in Baden-Wuerttemberg to -0.9% in Hesse.

In the eastern states of Saxony and Brandenburg, which incorporates the capital Berlin, prices were flat on the month and fell 0.6% from a year earlier - the sharpest annual contraction in prices since either state joined the Federal Rebublic in 1990.

A preliminary figure for Germany will be published later in the day after the state of Bavaria reports its data.

All five state statistics offices pointed to the sharp drop in energy prices over the last year as being chiefly responsible.

Crude oil prices had peaked at over $147 a barrel in the summer of 2008, and have more than halved since then. Gasoline prices at the pump have fallen by around 20% in that time, the statistics offices reported.

Food prices have also fallen in the last 12 months after a worldwide price spike in 2007 and early 2008. The first five states to report showed they had fallen by between 2.5% and 3.0% since July last year.

The ECB has said it expects consumer prices across the euro zone to fall for a few months in the second half of 2009, but for inflation to return to the bank's targeted level of "close to, but below 2%" in the medium term.