Increases in services and food costs contributed significantly to May’s rise in German inflation, although energy prices continued to fall.
Inflation in Germany for May was up 2.4% year-on-year, according to just published figures from the Federal Statistical Office.
That was in line with analyst expectations, the first rise for five months and a slight rise from the three-year low of 2.2% seen in both March and April.
The increase was mainly due to a rise in services costs, which came in at 3.9% in May, up from 3.4% in April. Food costs also increased, up 0.6% on last month, and 0.5% in April.
However, the prices of goods saw a slowdown, inching up 1% in May, compared with 1.2% in the previous month, with energy prices continuing to fall further, at -1.1%, down from -1.2%.
This was in spite of some German energy price subsidies and caps being recently wound up, as well as the country launching an increased carbon price at the beginning of the year. Germany also ended the temporary VAT discount for district heating and gas in April this year.
Year-on-year core inflation, which does not take into account energy and food prices due to their inherent volatility, came in at 3% in May. Month-on-month inflation was 0.1% for May, a five-month low and in line with market forecasts. April’s figure, in contrast, was 0.5%.
Ruth Brand, President of the Federal Statistical Office said, in a press release: “The inflation rate is slightly up again, mainly due to the continued increase in service prices. By contrast, energy and food prices have had a dampening effect on overall inflation since the beginning of the year.”
Could this spell trouble for the German economy?
The German economy has been struggling, due to higher inflation, higher interest rates and economic uncertainty, which has led to dampened consumer sentiment.
However, as inflation began to fall, consumers and businesses alike had started seeing signs of optimism pointing towards Germany’s recovery. Although in line with analysts’ forecasts, May’s figure may lead to increased worries about the economy backtracking.
The European Central Bank (ECB) recently cut its interest rates from a record high of 4% to 3.75% at its June meeting. With Germany, the second largest economy in Europe, still seeing a rise in inflation, the ECB’s move could cause concern about further cuts in interest rates.
The ECB has so far held back about its future plans. ECB President Christine Lagarde said, as reported by Associated Press (AP): “We will keep policy rates sufficiently restrictive for as long as necessary. We are not committing to a particular rate path. Are we today moving into a dialling-back phase? I wouldn’t volunteer that.”
