Recovery of Inflation Rate
German Inflation Slightly Above Target Despite Lower Energy Prices
Despite a drop in energy prices, the inflation rate in Germany remains above the European Central Bank (ECB) target for May. The Federal Statistical Office reports that prices for goods and services have increased by 2.1% compared to the same month last year.
On a month-to-month basis, prices increased by 0.1%, with energy costs becoming 4.6% cheaper than a year ago. This decrease in energy prices is attributed to lower world market prices for oil, primarily due to the trade war initiated by US President Donald Trump. However, food prices continued to rise, leading the overall inflation rate.
Food prices saw a 2.8% increase, with non-alcoholic beverages and fruit prices soaring by 8.9% and 8.6% respectively in North Rhine-Westphalia. Services cost 3.4% more, while goods became 0.9% more expensive. Notably, the inflation rate when excluding food and energy—often referred to as core inflation—fell to 2.8%.
Germany's inflation rate calculated according to European standards is slightly above the ECB's target of 2%. The central bank has lowered its key interest rate seven times in a row due to the easing of price pressure.
Chief economist of Commerzbank, Jörg Krämer, pointed out that the inflation rate, without the volatile prices for energy and food, remains above 2.8%. While the prices of services are no longer rising as strongly, the prices of goods have recently increased again. Krämer suggests that inflation persists in the German economy.
Key Factors Behind Persistent Goods Price Inflation* Despite significant declines in energy prices, services inflation has accelerated, while core inflation remains elevated.* Wage growth and tight labor markets can feed into higher goods and services prices.* Imported costs and the appreciation of the Euro can partially offset lower inflationary pressures.
Despite the sharp drop in energy prices, persistent inflation in Germany is driven by rising services prices, elevated core and food inflation, wage pressures from a tight labor market, and imported costs. These factors outweigh the deflationary impact of falling energy prices, resulting in an overall inflationary environment. The divergence between energy/goods prices and services prices is a key feature of current German inflation dynamics.
- The German government may need to revise its employment policy to address rising service prices, as they are a significant contributor to persistent inflation, especially in the absence of significant declines in energy prices.
- In light of the ongoing inflation in Germany, it might be pertinent for businesses to reassess their finance strategies to account for potential increases in the cost of goods and services, considering the factors driving the inflation, such as wage growth, tight labor markets, imported costs, and the appreciation of the Euro.
