German Inflation Climbs To 2.8% In May

(RTTNews) - Germany's consumer price inflation accelerated in May and core inflation remained steady, suggesting the stickiness of inflation that could cloud the outlook for the European Central Bank as it prepares to lower interest rates next week.

Inflation, based on the harmonized index of consumer prices or HICP, climbed to 2.8 percent from 2.4 percent in April, preliminary data from the statistical office Destatis showed Wednesday.

The figure rose for a second straight month. Economists had forecast 2.7 percent inflation. The consumer price index, or CPI, rose 2.4 percent year-on-year in May, following a 2.2 percent increase in each of the previous months. The acceleration was in line with expectations. The CPI excluding food and energy rose 3.0 percent year-on-year in May, the same as in the previous month. Services inflation accelerated in May after easing in the previous month, rising to 3.9 percent from 3.4 percent. This was largely due to a base effect due to the Germany ticket launched for cheaper public transport last year. Goods inflation slowed to 1.0 percent from 1.2 percent. Further, data released by Destatis earlier today showed that real wages grew 3.8 percent year-on-year in the first quarter, marking the fourth increase in a row and the strongest year-on-year growth since the time series began in 2008.

Energy prices continued to decline, down 1.1 percent from a year ago. Food prices rose for a second straight month, up 0.6 percent following a 0.5 percent increase in April.

Compared to the previous month, the HICP edged up 0.1 percent and the CPI rose 0.2 percent in May. Economists had expected both measures to increase 0.2 percent. Elsewhere, survey data from GfK showed earlier on Wednesday that the German consumer confidence is set to improve in June on rising income and economic expectations. However, the survey also showed that the propensity to buy failed to gain any benefit from the increasing economic and income expectations.

Higher prices for food and energy as well as the ongoing uncertainty forced households to set aside financial resources for future rather than spending, GfK said.

The ECB has signaled that it will reduce interest rates in June, but recent data suggest there is limited scope for any easing beyond that this year. So, what are the expectations for June and beyond?

ING economist Carsten Brzeski said anything other than a cut of 25 basis points next week would be a major surprise and a severe reputational loss for the central bank. Why?

Brzeski pointed out that German data also shows that the risk of reflation is real and this together with a eurozone economy gradually recovering, could limit the ECB's room for maneuver beyond the June meeting.

"Today's German inflation data not only illustrates the ongoing impact of base effects and earlier government measures on present inflation but also stresses how sticky inflation remains," the economist said.

"That stickiness looks set to continue as favourable energy base effects are petering out while, at the same time, the economy is gaining traction and wages are increasing."

ING still sees German inflation hovering within the broader range of between 2-3 percent rather than returning on a straight line to 2 percent.

Commerzbank economist Ralph Solveen expects the German inflation rate to stabilize at around 2.5 percent and the core inflation rate at just under 3 percent in the coming months.

"This would put both rates well above the ECB's inflation target and would therefore be an argument for the central bank to proceed cautiously with the interest rate cuts that are likely to start next week," Solveen said.