Inflation in Germany remains at 2.1 percent: Price increases remain persistent

It wasn't enough after all: Inflation in Germany narrowly missed the target of 2.0 percent in May. According to preliminary figures from the Federal Statistical Office (Destatis), inflation was 2.1 percent compared to May 2024 – the same figure had already been recorded for April. According to data available so far, consumer prices rose by 0.1 percent compared to the previous month.

For the rate excluding food and energy – often referred to as core inflation – the Wiesbaden-based authority predicted an increase of 2.8 percent. In April, the figure was still 2.9 percent. This indicator provides information about the longer-term trend in prices. For Silke Tober of the IMK research institute, which is close to the trade unions, this slowdown is crucial: "Over the remainder of the year, the inflation rate is likely to fluctuate around the European Central Bank's inflation target of 2 percent." At the same time, the economic outlook in Germany and the eurozone remained gloomy. Small glimmers of hope, such as the slight increase in economic output in the first quarter, had little impact on this.

The 2 percent is something of a magic number for central bankers because it serves as an indicator of price stability. If this is achieved, it will have significant implications for interest rates and monetary policy. The official ECB definition is: "In the medium term, we aim for an inflation rate of 2 percent. We understand this target as a symmetrical one. This means that, in our view, an inflation rate that is too low is just as negative as an inflation rate that is too high." According to financial service Dow Jones, a large number of experts had forecast 2.0 percent for Germany. But inflation is proving more persistent than expected.

Michael Heise, Chief Economist at HQ Trust, emphasized: "Consumers owe the comparatively moderate price increase not least to the continued decline in energy prices." Here, prices fell by 4.6 percent. However, consumers are not happy about services and food, which remain significantly more expensive than a year ago.

What to do? "The new government could make a very important contribution to reducing inflation if it stops the increase in non-wage labor costs caused by social security contributions," Heise said. Furthermore, energy prices would have to be reduced through lower taxes and levies on electricity consumption. Then inflation could fall well below 2 percent. "That would be a blessing for consumers – and a nice boost for the economy."

In Spain, consumer prices fell below the two percent mark in May for the first time in seven months. Statisticians in Italy also reported a rate of just 1.9 percent on Friday.

Across the eurozone as a whole, inflation recently stood at 2.2 percent. Next Thursday, the central bank's highest body, the ECB Governing Council, will decide on key interest rates. So far, a large majority of observers expect further rate cuts. However, the current situation is extremely complex. Council member Fabio Panetta recently made it clear that inflation is "almost completely under control." At the same time, however, he emphasized that "carefully considered decisions" are now needed.

The main cause is the unpredictable trade policy of US President Donald Trump. This has led to an appreciation of the euro, making exports from companies in the monetary union to other countries more expensive. Panetta also spoke of "growing uncertainty," referring to the economic development in the US.

Economists are circulating fears of a recession that could also spread to the Old Continent. Meanwhile, ECB Chief Economist Philip Lane recently pointed out in an interview that a possible positive effect could be that US weakness could further reduce oil and gas prices, which would further dampen inflation here as well.

Many economists expect a similar effect if, despite negotiations between the US and China, high US import tariffs on Chinese products are ultimately imposed. If goods from the People's Republic are then diverted in large quantities to Europe, Panetta estimates this could "depress production and inflation" there.

ECB economists are currently particularly focused on wage developments. Germany plays a key role in this. The labor market in the Eurozone's largest economy remains "significantly slack," and wage growth is slowing overall, according to Grant Slade of the financial analysis service Morningstar. Therefore, there is now scope for further interest rate cuts.

Tober also recommends: "With the aim of strengthening domestic demand, the ECB should further loosen monetary policy." Specifically, this could result in a reduction of the deposit rate from 2.25 percent to 2.00 percent. Key interest rates are particularly important for the entire money market and for lending.