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German inflation slows sharply in May

German inflation fell sharply in May on lower energy costs, official data showed Wednesday.

German inflation slows sharply in May
Inflation has eased in recent months but food prices remain well above 2020 levels, seen in this file photo. Photo: Mads Claus Rasmussen/Ritzau Scanpix

Germany’s annual inflation rate eased to 6.1 percent, down from 7.2 percent in April, the federal statistics office Destatis said in preliminary figures.

Analysts surveyed by FactSet had expected a May reading of 6.4 percent, meaning that cost of living in Germany went up again, but by a little less than originally expected.

The drop was partly down to the comparison with May 2022, when energy prices soared in the wake of Russia’s invasion of Ukraine.

Energy prices have come down from their peaks in recent months, helped by government relief measures to cushion the impact on consumers and businesses.

Food prices, however, continued to show “above average growth” in May compared with a year earlier, Destatis said. While inflation has seen increases of nearly ten percent some months since the invasion, the prices for key food items, such as meat, eggs, or butter – have gone up by much more.

Increases for these goods have broken 20 percent in many cases.

READ ALSO: Which products are driving up inflation in Germany?

Prices in the service sector also cooled this month, “probably due in part to the introduction of the Germany ticket”, Destatis said, referring to the new public transport card allowing unlimited travel across Germany for 49 euros a month.

“The significant drop in the German inflation rate” brings “some relief”, said KfW chief economist Fritzi Koehler-Geib.

“But there is still a long way to go,” she said, before inflation reaches the European Central Bank’s two-percent target.

The ECB has hiked interest rates by an unprecedented 3.75 percentage points since last July in an attempt to bring down rapidly rising consumer prices.

ECB vice-president Luis de Guindos earlier on Wednesday welcomed “positive” inflation data out of key eurozone economies recently, but he too warned that the battle against high prices was not over.

“The data that we have received yesterday and today is positive, it’s a decline in headline inflation,” de Guindos told reporters.

“But I would not say that the victory is there,” he said.

“We are on a correct trajectory and we have to look very carefully at the evolution of core inflation” which excludes volatile food and energy prices, he added.

READ ALSO: Why inflation in Germany could slow down despite soaring food prices

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ECONOMY

German inflation drops to lowest level since start of war in Ukraine

German inflation slowed in September to the lowest level since the outbreak of the Ukraine war, data showed Thursday, offering a glimmer of hope even as Europe's top economy struggles to emerge from a recession.

German inflation drops to lowest level since start of war in Ukraine

Russia’s invasion of Ukraine last year, and subsequent move to slash crucial gas exports, triggered an energy crisis and sent consumer prices surging in Europe, with Germany particularly hard hit.

But inflation came in at 4.5 percent year-on-year this month, down from 6.1 percent in August, according to preliminary data from national statistics agency Destatis, with sharply lower energy costs contributing.

The last time inflation was lower was in February, 2022, the month Russia sent its forces into Ukraine, it said.

READ ALSO: What impact has a year of war in Ukraine had on Germany’s economy?

“The abrupt drop in inflation is an important signal for the success of the fight against inflation,” said Fritzi Koehler-Geib, chief economist at public lender KfW.

“This can help to continually weaken price increases in the coming months as consumers and companies adjust their inflation expectations downward under the impression of the positive news.”

The news will come as a relief to the European Central Bank, which has hiked interest rates aggressively to fight inflation, and will bolster expectations of a pause at its next meeting in October.

It is also a boost for policymakers in Europe’s industrial powerhouse as they battle myriad problems.

There is weakness in the key manufacturing sector and households are feeling the pain of the ECB rate hikes.

Problems in the global economy, and in particular a slow recovery from the pandemic in Germany’s top trading partner China, are also weighing on the export giant.

Gloomy outlook

An updated joint forecast from leading economic institutes released Thursday highlighted the challenges — they now predict the German economy will shrink by 0.6 percent across the whole of 2023, sharply lower than earlier predictions.

The economy is struggling to get back on its feet after falling into recession around the turn of the year, and stagnating in the second quarter.

READ ALSO: German recession predicted to be ‘less than feared’

There were positive signs at the start of the year that Germany may have weathered the energy crisis better than expected, and could avoid a sharp downturn this year.

But a string of gloomy signals in recent weeks — from lacklustre exports to poor business confidence — suggest the outlook is worsening.

The IMF has predicted that Germany will be the only major advanced economy to shrink this year, while the European Commission earlier this month said it expects the German economy to contract more sharply than previously forecast.

On the latest inflation reading, economists said the sharp fall was also driven by some one-off factors which distorted the comparison.

These included the end of a popular discount travel card system in Germany in September 2022, which pushed up prices then.

Still, ING economist Carsten Brzeski said the data has “made the call for a pause at the European Central Bank’s October meeting even stronger,” even if eurozone inflation remains well above the ECB’s two-percent target.

“Confidence continues to weaken and inflation has come down, even though it is still nowhere near levels that would bring relief or comfort to the central bank,” he said.

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