German inflation higher than expected ahead of ECB rates decision

German inflation higher than expected ahead of ECB rates decision

By Rachel More

BERLIN (Reuters) -German inflation rose slightly more than forecast to 2.8% in May, although economists said an increase had been expected and should not alarm European Central Bank policymakers ahead of their interest rate decision next week.

Analysts polled by Reuters had forecast a reading of 2.7%, after a year-on-year increase in consumer prices of 2.4% in April, based on data harmonised to compare with other European Union countries.

Economists are paying close attention to the data from Germany – Europe’s biggest economy – ahead of the release of inflation figures from the wider euro zone on Friday.

The ECB looks set to lower interest rates next week after its biggest ever streak of hikes brought down inflation to just above its 2% target but also choked off credit.

However, officials have said the pace and scope of further reductions will depend on the durability of low inflation.

In Germany, cooling energy and food prices have had an easing effect on inflation this year – but core inflation, which excludes those more volatile elements, has remained high.

In May, core inflation was 3.0%, the federal statistics office said, unchanged on the previous month.

BASE EFFECT OVER

Many economists said the second monthly increase in harmonised inflation was no reason to panic.

They pointed to the fact that the May reading was largely expected, partly because of the one-off effect caused by the ending of a cheap national railway ticket scheme introduced a year earlier.

“This expected uptick in inflation will not change anything for the ECB’s decision next Thursday,” said Elmar Voelker, economist at the LBBW bank.

The ECB “will therefore carry out the planned turnaround in interest rates,” Voelker said, adding however that price trends over the summer would decide the speed of further monetary easing.

However, Michael Heise, chief economist at the HQ Trust financial institute, said the ECB had a “difficult choice” to make.

“The current and expected price trend in the coming months does not yet show any clear convergence towards the central bank’s two per cent target,” he said.

Germany’s economic outlook has brightened somewhat following the painful severing of Russian energy imports in the wake of the Ukraine invasion which sent inflation soaring into double-digit territory.

At the start of this year, Germany skirted a recession with 0.2% growth in the first quarter.

But the rate of recovery remains slow. The German government has forecast economic growth of 0.3% this year and 1.0% in 2025. It expects a 2024 inflation rate of 2.4%.

(Reporting by Rachel More, editing by Andrey Sychev, Madeline Chambers and Toby Chopra)