German inflation nears ECB target in May but challenges remain

By Rachel More and Balazs Koranyi

BERLIN (Reuters) -German inflation eased further in May, bringing it closer to the European Central Bank's 2% target and bolstering the case for an interest rate cut next week, but economic turmoil and stubbornly high core inflation may overshadow hopes for a lasting recovery.

Inflation slowed to 2.1% from 2.2% in April, the federal statistics office reported on Friday, citing preliminary data harmonised to compare with other European countries.

Analysts polled by Reuters had forecast a reading of 2.0%.

Germany, the euro zone's largest economy, published its figures ahead of data for the entire currency bloc on Tuesday. Both are facing similar risks, mainly due to U.S. President Donald Trump's policies, said IMK economist Silke Tober, who specialises in monetary policy.

"The economic outlook in Germany and the euro zone remains gloomy and the risks for the economy are high due to the drastic and erratic tariff policy of the U.S. president," Tober said.

"With the aim of strengthening domestic demand, the ECB should therefore ease monetary policy further in the near future," she added.

Euro zone inflation is expected to ease to 2.1% in May from 2.2% in April, according to economists polled by Reuters.

Euro zone inflation is on a downward slope and could already hit the ECB's 2% target this month on muted wage growth, lower energy prices and a strong currency, justifying another rate cut on June 5.

In fact, economists think inflation will head well below the ECB's target around the turn of the year, mostly on a statistical base effect, before rebounding back towards 2% later in 2026.

Even further out, tariffs, trade fragmentation and deglobalization could all prove inflationary, suggesting that the short and the medium-term outlooks are quite different and may require a different policy response.

Economists said challenges remained for the German economy, which contracted for the second consecutive year in 2024, despite the slight easing in price pressures in May.

The government currently forecasts stagnation in 2025, which would make for the longest period without growth for Germany in its post-war history.

Core inflation, which excludes volatile food and energy prices, also slowed slightly in May to 2.8% from 2.9% the previous month but remains persistently high.

Month on month, prices rose by 0.2%, above analysts' forecast for a 0.1% increase.

(Reporting by Rachel More, editing by Thomas Seythal and Hugh Lawson)