Current financial state - Prices for services increased in May, leading to a rise in overall inflation.
In May, the cost of living in Germany experienced an increase again. This was the first instance where inflation rose notably this year, as per preliminary data from the Wiesbaden Statistical Office. Inflation had stagnated at a rate of 2.2% in April. While some economic experts believe that the inflation dilemma has not yet been resolved, others are not as worried.
"Things will get bumpy," expressed KfW's Chief Economist, Fritzi Köhler-Geib. ING's Chief Economist, Carsten Brzeski, commented that "inflation's persistence is evident" in the current data. German Bank Economist, Sebastian Becker, however, is not overly concerned. According to him, the inflation rate may dip under the symbolic 2% benchmark "briefly" due to decreasing energy prices this summer.
Energy prices have dropped by 1.1% compared to the previous year, despite the reinstatement of the standard 19% VAT rate on natural gas and district heating from April 1. An earlier move by the government decreased the VAT rate for these items from October 1, 2022 to March 31, 2024 to 7%, to mitigate the high energy prices caused by the Russian invasion of Ukraine.
Food prices also saw an increase of 0.6% compared to the previous year.
Costs for services have gone up significantly, as per preliminary data. Insurance services in particular witnessed a steep rise in prices. Additionally, people had to pay more for dining out than the previous year. Higher inflation rates can reduce the buying power of consumers.
Record high inflation led to increased nominal wages in the first quarter, thanks to wage increases and inflation adjustment premiums. These resulted in a 6.4% surge in nominal wages of employees. During this period, consumer prices increased by 2.5%. This ultimately produced a massive 3.8% growth in real wages. This was the most notable increase since the inception of the statistic in 2008, reported the Federal Office.
Increased real wages can strengthen consumer purchasing power, potentially boosting consumption as a significant economic driver. Although people kept their savings in the first quarter, this trend could shift.
German consumer sentiment improved for the fourth time in a row, as per the latest Consumer Climate Study from Nuremberg Research Institutes GfK and NIM. However, their desire for significant purchases remains muted.
There was also a statistical factor at play behind the inflation rise in May. Economist Friedrich Heinemann from the Mannheim Economic Research Institute ZEW stated that "the Germany ticket's low-pricing impact is no longer in the April-May comparison."
There was a 0.1% rise in consumer prices, compared to the previous month of April, as per provisional data.
The historically high inflation rates of the past two years are now in the past. Major research institutes predict that the annualized inflation rate will decrease to 2.3% in the biggest European economy, compared to 5.9% in the previous year.
The ECB aims for long-term price stability of a 2% annual inflation rate in the euro area. After an unprecedented series of interest rate hikes to combat the temporarily high inflation, the first interest rate cut is anticipated in June. The ECB will convene for its next monetary policy meeting on June 6.
Eurostat on EU inflation, German Statistical Office on domestic inflation, ECB on inflation, ECB's stance on price stability, Time-Series ECB key interest rates, ECB discussions on wages, Inflation in May (provisional data), ECB's communication on inflation.
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