Inflationary Signs Emerge in Germany: Three States See Price Increases

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Preliminary data from May shows a slight increase in inflation in three German states, suggesting a possible uptick in national inflation for Europe’s largest economy, although one state did see a decline in price growth. Economists are closely monitoring the national data due later on Wednesday, which precedes the euro zone inflation report expected on Friday.

In North Rhine-Westphalia, Germany’s most populous state, the inflation rate rose to 2.5% year-on-year in May from 2.3% in April. Bavaria saw an increase to 2.7% from 2.5%, and Saxony’s rate climbed to 3.1% from 2.7%. Conversely, Brandenburg experienced a slight decrease to 2.9% from 3.0%. In Hesse and Baden-Wuerttemberg, the rates remained stable at 1.9% and 2.1%, respectively.

Economists surveyed by Reuters forecast that Germany’s harmonized inflation rate will be 2.7% in May, up from 2.4% in April. This anticipated rise is partly attributed to the conclusion of a national railway ticket scheme that had reduced public transport prices since May 2023.

For the euro zone, inflation is expected to increase slightly to 2.5% in May from 2.4% in April, according to Reuters economists. The European Central Bank (ECB) will closely examine this figure as it considers lowering interest rates next week, following a series of rate hikes aimed at reducing inflation to just above its 2% target. The pace and extent of further rate reductions will depend on the sustainability of lower inflation levels.

An ECB survey released on Tuesday indicated that euro zone consumers had reduced their inflation expectations last month. In Germany, there are positive economic signs, with consumer sentiment improving for the fourth consecutive month heading into June and real wages increasing by a record 3.8% in the first quarter of 2024.