Germany: May inflation rate drops to 6.1%

German inflation fell in May in part because of lower energy costs, official data showed on Wednesday.

The annual inflation rate in Europe’s biggest economy fell to 6.1% from 7.2% in April, the federal statistics office Destatis said in provisional figures. Analysts polled by FactSet had expected May’s higher reading of 6.4%.

According to Destatis, the increase in consumer prices has been slowing down for the third consecutive month. The last time the annual inflation rate in Germany was lower was in March 2022, when it was at 5.9%. Inflation peaked late last year at around 10% and stayed above 8% from August 2022 to March this year.

The government’s easing measures have also helped to bring energy prices down from their peaks in recent months, striving to soften the blow to consumers and businesses alike. However, the cost of groceries continued to rise faster than average in May compared to a year earlier, Destatis said.

According to the federal statistics office, a possible explanation for the reduction in service sector inflation was the introduction of a new flat-rate monthly rail pass that costs €49 (about US$52), meaning that some people are saving money on train tickets.

ECB warns of vulnerabilities in the eurozone

Higher interest rates to fight inflation are “testing the resilience” of euro zone households and businesses as credit conditions tighten, the European Central Bank said in a report published on Wednesday.

“As we tighten monetary policy to reduce high inflation, this could reveal vulnerabilities in the financial system,” ECB Vice President Luis de Guindos said in a statement accompanying the Financial Stability Review.

The ECB has raised its benchmark interest rates by 3.75 percentage points since last July in a bid to stem the rapid rise in consumer prices in the 20-nation currency club. This comes after nearly 15 years of unprecedented rates at or near 0% following the financial crisis.

The idea behind raising interest rates to fight inflation is to discourage borrowing and spending by making it more expensive. But the associated risk is that, if it is too effective, it can stifle growth and economic activity.

While economic conditions have “improved somewhat” and energy prices have fallen, higher borrowing costs and tighter credit conditions are “testing the resilience of euro zone companies, households and sovereigns”, the euro zone said. half-yearly report.

Demand for new loans, especially mortgages, fell sharply in the first quarter of 2023, he said. However, the current “correction” in housing markets “could become disorderly if higher mortgage rates further reduce demand,” the report warned.

Financial markets and investment funds are also “vulnerable to disorderly adjustments”, he said, “particularly in the event of renewed fears of recession”.

Euro zone inflation stood at 7% in April, well above the ECB’s 2% target. Another rate hike is expected in June.

los/msh (dpa, AFP, Reuters)