Germany May Inflation Slows to 2.6%, While Core Prices Strengthen and Bolster ECB Rate-Hike Case

Germany’s inflation eased in May ahead of the European Central Bank’s next policy decision, but underlying price pressures strengthened in a sign that could keep the case for a rate increase intact.

The moderation in headline inflation reflected slower increases in energy and food prices. Even so, firmer core inflation is adding to expectations that the ECB will raise its benchmark interest rate at its June 11 meeting.

Germany’s Federal Statistical Office said in preliminary data released May 29 that the consumer price index rose 2.6% in May from a year earlier, while falling 0.2% from the previous month.

On the ECB’s harmonized measure, inflation was 2.7% from a year earlier and down 0.1% from April.

The May headline reading was lower than April’s 2.9%.

Energy prices rose 6.6%, slowing sharply from 10.1% a month earlier. Food inflation also cooled, to 0.4% from 1.2% in April.

Der Spiegel reported that lower international oil prices in May than in April, along with Germany’s fuel-tax cut that took effect on May 1, helped slow inflation.

The Bundesbank had previously estimated that the tax relief would reduce inflation by about 0.25 percentage point.

Core inflation, which strips out food and energy and is seen as a gauge of underlying price pressures, remained elevated. Germany’s core consumer inflation rate rose to 2.5% in May from 2.3% a month earlier.

Price pressures have eased somewhat, but inflation remains above the ECB’s 2.0% medium-term target.

Among the euro area’s other major economies, inflation also stayed well above that goal in May. France posted 2.8%, Italy 3.3% and Spain 3.6%.

Bloomberg reported that inflation pressures intensified once food and energy were excluded, suggesting the latest data are unlikely to alter the ECB’s tightening stance.

The ECB left policy rates unchanged at its monetary policy meeting last month.

Still, markets are leaning toward a rate increase at the June 11 meeting as the prolonged war in the Middle East raises concerns that higher energy prices driven by geopolitical risks could feed through more broadly into inflation.

Minutes of the April meeting released recently showed many policymakers viewed the decision to leave rates unchanged as finely balanced. They indicated they would not have opposed an increase had such a proposal been formally presented.

ECB President Christine Lagarde said in late March that the central bank would look through an energy price shock if it was limited and temporary, but respond forcefully if it proved persistent. At the meeting a month later, policymakers said it was becoming increasingly likely that such a traditional approach might no longer be appropriate.

Park Sang-kyung, Hankyung.com reporter highseoul@hankyung.com