Germany's consumer price inflation surged in May while core inflation held steady, underscoring persistent inflation that could complicate the European Central Bank's (ECB) plans to lower interest rates next week.
According to preliminary data released by the statistical office Destatis on Wednesday, inflation, measured through the Harmonized Index of Consumer Prices (HICP), rose to 2.8% in May from 2.4% in April. This marks the second consecutive month of acceleration and slightly exceeds economists' forecasts of 2.7%.
The Consumer Price Index (CPI) also climbed, reaching 2.4% year-on-year in May, up from 2.2% in the previous months. This rise met expectations. Excluding food and energy, the CPI grew by 3.0% year-on-year, maintaining the rate from the previous month. Notably, services inflation, which had eased in the prior month, accelerated to 3.9% from 3.4%, largely influenced by the effect of last year's Germany ticket for cheaper public transport. Meanwhile, goods inflation eased to 1.0% from 1.2%.
Further data from Destatis indicated that real wages increased by 3.8% year-on-year in the first quarter, marking the fourth consecutive rise and the strongest growth since 2008.
Energy prices continued their decline, falling by 1.1% compared to the previous year. Conversely, food prices saw a rise for the second consecutive month, increasing by 0.6% following a 0.5% rise in April.
Month-on-month, the HICP edged up by 0.1% and the CPI by 0.2% in May, aligning with economists' expectations of a 0.2% increase for both measures.
Elsewhere, survey data from GfK indicated an improvement in German consumer confidence for June, driven by rising income and economic expectations. However, the propensity to buy did not benefit from these positive outlooks as households remained cautious, preferring to save rather than spend amidst economic uncertainties.
The ECB has signaled its intention to reduce interest rates in June. However, recent data suggests limited room for further easing this year beyond the anticipated cut.
Carsten Brzeski, an economist at ING, stated that any deviation from a 25 basis point cut next week would be surprising and could damage the central bank's reputation. He noted that ongoing German data highlights the risk of reflation, which, along with a gradually recovering Eurozone economy, might constrain the ECB's flexibility after the June meeting.
"The latest German inflation data emphasizes the impact of base effects and past government measures, illustrating how stubborn inflation remains," said Brzeski. "This persistence is likely to continue as the favorable energy base effects diminish while the economy strengthens and wages rise."
ING forecasts that German inflation will stabilize within a range of 2-3%, rather than quickly aligning to 2%.
Ralph Solveen of Commerzbank anticipates the German inflation rate to stabilize around 2.5%, with core inflation just under 3% in the upcoming months. "Both rates would remain above the ECB's inflation target, advocating for a cautious approach to the interest rate cuts expected to commence next week," Solveen remarked.
