Breathe a sigh of relief for German consumers: inflation slowed down significantly in May, and at 6.1 percent, the inflation rate reached its lowest level in more than a year. Economists evaluated the preliminary calculations of the German Federal Statistical Office on Wednesday as a good signal, but warned against giving the all-clear signal too early.
“Anyone who is already expecting a return to price stability because of the fall in inflation could be rejoicing too soon,” commented Friedrich Heinemann from the ZEW – Leibniz Center for European Economic Research in Mannheim. Inflation in many services, driven by rising wage costs, is only just getting going. “In the summer months, consumers will feel this strongly in the prices for tourism services,” predicted Heinemann.
All the same: in May, the general upward pressure on consumer prices lost momentum for the third month in a row. According to calculations by the German Federal Office, the prices for both food and energy rose much less than in April of the current year.
“We’re heading in the right direction, but there’s still a long way to go,” said KfW chief economist Fritzi Köhler-Geib. “The significant loss of purchasing power among consumers was the main reason why Germany slipped into recession in the winter. The significant drop in the German inflation rate is at least bringing some relief.”
In March of the current year, the inflation rate fell below the 8 percent mark for the first time since August 2022 at 7.4 percent. The Wiesbaden statisticians had calculated an inflation rate of 7.2 percent for April (in Austria it was 9.7 percent year-on-year in April). The annual inflation rate in Germany was last lower than in May in March 2022, when it was 5.9 percent. According to calculations by the Federal Office, consumer prices fell by 0.1 percent from April to May of the current year.
In May, too, food and energy in Germany were sometimes significantly more expensive than a year earlier. According to provisional calculations by German statisticians, food prices rose by 14.9 percent within a year. In April, however, food prices in Germany were still 17.2 percent above the level of the same month last year, and in March it was even 22.3 percent.
Based on its latest survey of companies’ price plans, the Munich-based Ifo Institute concluded that price increases in Germany will “probably slow down” in the coming months. In trade and industry, there were even signs of significant price reductions in some cases. “But it will be some time before that gets through to the consumer,” said Ifo researcher Timo Wollmershäuser. The inflation rate for consumers will therefore “fall only very slowly”.
In May, the rise in energy prices weakened significantly: energy prices in Germany were 2.6 percent higher than in the same month last year. In April it was still 6.8 percent. The federal government is trying to relieve the burden in this area: the price brakes that apply retrospectively to January 1 are intended to make natural gas, electricity and district heating more affordable.
The introduction of the Deutschlandticket on May 1 is also having an effect, as shown by inflation reports from the federal states: many people had to spend less money on commuting to work and other journeys by bus or train.
The European Central Bank (ECB) is also trying to dampen inflation with higher interest rates. Higher interest rates make credit more expensive, which can curb demand. In the medium term, the central bank is aiming for stable prices in the euro area with an inflation rate of two percent.
After seven interest rate hikes in a row, the key interest rate in the currency area of the 20 countries is now 3.75 percent. After the latest increase in early May, ECB President Christine Lagarde made it clear that the ECB was not finished yet: “We know that we still have some ground to make up.” Bundesbank President Joachim Nagel recently said that, in his view, “several interest rate hikes are necessary” to get inflation under control in the long term.
Commerzbank chief economist Jörg Kramer expects inflation rates to fall further in Germany in the coming months, but “the all-clear signal is not appropriate”: “The rapidly rising labor costs speak against a lasting calming of inflation.” Among other things, rising wages can lead to companies raising prices, which could fuel inflation again.