German unemployment dropped in February to its lowest level in nearly one and a half years, boding well for domestic demand, which the government hopes will help drive growth this year.

The number of people out of work in Europe's largest economy decreased by 14,000 to 2.914 million, data from the Labour Office showed.

That meant there were fewer unemployed people in Germany than at any time since September 2012.

The mid-range forecast in a Reuters poll had been for a drop of 10,000. It was the third consecutive monthly drop in joblessness.

Separate data from the Federal Statistics Office today showed employment climbing to a record high of almost 42 million.

That, along with moderate inflation, an expected rise in wages and low interest rates, should encourage traditionally thrifty Germans to spend rather than save.

Berlin expects private consumption, which boosted growth in 2013, to increase by 1.4% as workers benefit from an increase in employment to an expected record of 42.1 million this year and a nominal 2.7% jump in earnings.

Consumer morale has risen to its highest level in seven years as shoppers in Europe's biggest economy have become more upbeat about their future income, a GfK survey showed this week.

The jobless rate held steady at 6.8%, its lowest level since German reunification more than two decades ago. It was in line with the consensus forecast in a Reuters poll.

That makes Germany's labour market the envy of struggling euro zone peers like Greece, where more than one in four people are out of work.

Nonetheless, some businesses are cutting jobs. Barmer GEK, Germany's largest statutory health insurance provider, said this week it was slashing 3,500 jobs, or 20% of total staff, in response to deteriorating market conditions and changes in client behaviour. 

Recent sentiment indicators have been upbeat but the latest hard data has shown exports, industrial output and orders falling in December while gross domestic product grew by just 0.4% in the fourth quarter.

Meanwhile, the rate of inflation in Germany inched lower in February, official preliminary data showed today. The cost of living rose by 1.2% on a 12-month basis this month, compared with 1.3% in January, the federal statistics office Destatis said in a statement.

Using the Harmonised Index of Consumer Prices (HICP), the European Central Bank's inflation yardstick, inflation in Germany stood at 1% in February, down from 1.2% in January. 

The ECB defines price stability as increases in the harmonised index of close to but just below 2%.

The preliminary data are calculated on the basis of cost-of-living statistics from six so-called indicator states.

Final data based on consumer price inflation in all 16 of Germany's regional states are scheduled to be published on March 14.