Inflationary pressures ease off significantly

Consumer prices in Germany rose more slowly in May than they have in more than a year. Goods and services cost an average of 6.1 percent more than a year earlier, according to an initial estimate by the Federal Statistical Office on Wednesday. In April, the inflation rate was 7.2 percent.

In North Rhine-Westphalia, consumer prices rose by only 5.7 percent after 6.7 percent in April, the State Statistical Office had previously announced. The inflation rate was also significantly lower than in April in Bavaria (6.1 percent), Baden-Württemberg (6.6 percent), Brandenburg (6.3 percent), Saxony (6.5 percent) and Hesse (5.9 percent). Economists surveyed by the Reuters news agency had expected consumer prices in Germany to rise by 6.5 percent.

Don’t rejoice too soon!

“The direction is right,” quotes the Reuters news agency as quoted by the chief economist at KfW Bank, Fritzi Koehler. “But we still have a long way to go.” The sensitive loss of purchasing power of consumers is the main reason why Germany slipped into recession in the winter. “The significant drop in the German inflation rate is at least bringing some relief.”

Her colleague, ZEW economist Friedrich Heinemann, is more skeptical about the current figures: “Germany and the euro zone continue to suffer from inflation that is still more than four percentage points above the European Central Bank’s inflation target of two percent. Who now Expecting a return to price stability because of the drop in inflation could be too early to celebrate. The inflationary loss of purchasing power is continuing.”

Berenberg Bank chief economist Holger Schmieding speaks of “good news for consumers and the European Central Bank”. The ECB had sharply increased its key interest rates due to high inflation, but this was having a negative impact on the economy.

For the chief economist at Commerzbank Jörg Kramer, this is “good news from the inflation front”. For the first time, core inflation – excluding fluctuating energy and food prices – fell from 5.8 percent to an estimated 5.3 percent. Inflation is likely to fall further in the coming months. “Nevertheless, an all-clear is not appropriate.”

Since inflation rates also fell significantly in France (6.0 percent) and Spain (3.2 percent) in May, the end of interest rate hikes is drawing near. However, experts expect two further steps upwards in the summer. According to its President Christine Lagarde, the ECB is striving to bring interest rates to a sufficiently high level so that the inflation target of 2.0 percent can be achieved in the long term.

No win yet

The latest regional data points in the right direction, according to ECB Vice President Luis de Guindos. “The data we got yesterday and today is positive,” deputy Central Bank President Christine Lagarde said on Wednesday at the presentation of the European Central Bank’s (ECB) semi-annual Financial Stability Report.

The drop in inflation was greater than analysts had expected. “The news we are getting is positive and pointing towards an important fall in headline inflation.” But it is still not a victory over the price surge.

Warning from Rome

According to Italy’s central bank chief Ignazio Visco, the ECB must now be careful not to tighten monetary policy too much. “Having brought benchmark rates to restrictive levels, we now need to proceed gradually with the right degree,” the European Central Bank (ECB) Governing Councilor told a Banca d’Italia event in Rome on Wednesday.

Economists understand a restrictive interest rate as an interest rate level that slows down an economy. Inappropriate tightening would have acute consequences for economic activity and negative impacts on financial stability and ultimately on price stability in the medium term, Visco said. The ECB must proceed gradually, but not slowly, to return to its inflation target.

Trend reversal in sight?

The figures from the German federal states “suggest the conclusion that the price pressure is decreasing across the board,” said economist Holger Schmieding. “Here the state helped with the Deutschlandticket.” The ticket in North Rhine-Westphalia has reduced the prices for combined passenger transport by 28.5 percent compared to the same month last year. As a result, the core rate, which is under special observation – in which the strongly fluctuating energy and food prices are factored out – fell from 5.5 to 5.0 percent. “Here we see the first signs of a real trend reversal,” said Schmieding.

In some areas, however, price pressure remains high. Package tours, for example, rose in price by 13.6 percent in Bavaria and Saxony. “It turns out that after the pandemic, Germans want to enjoy life again and really go on vacation, despite tight budgets,” said Schmieding. “This makes it easier for providers to pass on higher costs to consumers in these areas.”

Mixed prospects

It is unclear how inflation will develop in the future. “It will then become more complicated in the coming months,” said ING Germany chief economist Carsten Brzeski. “Because then we get base effects from the 9-euro ticket and fuel discount, which increases the inflationary pressure again.” Both were introduced by the federal government for June, July and August 2022 to relieve the burden on citizens.

At the same time, gas prices are extremely low and the price pressure in industry is easing considerably. “However, the service sector is still very inflationary,” said the ING chief economist. The inflation rate could therefore move towards seven percent again in the summer before dropping to a good four percent by winter.

dk/hb (rtr, dpa)