German inflation sees fall in June after May’s surprise rise

The preliminary estimates for the year-on-year German inflation report for June have been released, showing a slight drop to 2.2%, down from 2.4% in May, according to the Federal Statistical Office. This was also below analyst expectations of 2.3%. June’s figure remained the same as for both March and April. 

The June drop was mainly supported by goods inflation falling to 0.8% in June, from 1% in May, as well as energy costs dropping to -2.1% in June, down from from -1.1% on the previous month. However, food inflation grew to 1.1% in June, from 0.6% in May, while services inflation stayed mostly the same at 3.9%. 

Year-on-year core inflation, which does not take into account food and energy prices, because of their natural volatility, came in at 2.9% in June, down from 3% in both April and May. Month-on-month inflation came in at 0.1% in June, the same as May’s figure, missing market expectations of 0.2%. 

The final inflation numbers are expected to be released on 11 June. 

June’s inflation report could bring some much-needed relief

June’s inflation figure is expected to reassure investors that Germany is still on a downward trend, when it comes to inflation, despite May’s surprise spike. However, there are increasing anxieties about the pace of the German economy’s recovery slowing down, with consumers not being as optimistic about economic prospects in the last few months. 

Increasing political tensions in neighbouring France, which saw its first round of elections on 30 June, have also contributed to this uncertainty, due to the possibility of the far-right political party, National Rally, being elected. 

Although the European Central Bank (ECB) cut interest rates for the first time in nine months back in June, it is unclear when and by how much the next rate cut could be. 

At the time of the rate cut, the ECB said: “Since the Governing Council meeting in September 2023, inflation has fallen by more than 2.5% and the inflation outlook has improved markedly. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons.”

However, Bundesbank President Joachim Nagel has also highlighted the dangers of underestimating how precarious the current inflation situation remains, warning that the ECB is still likely to take a very measured and cautious approach when it comes to lowering interest rates. 

In the Bundesbank June forecast for Germany Nagel said: “The German economy is extricating itself from the period of economic weakness. Households are benefiting from strong wage growth, a gradual decline in inflation and a stable labour market. While the inflation rate in Germany is continuing to decline, the pace is subdued. We on the ECB Governing Council are not driving on auto-pilot when it comes to interest rate cuts.”