German inflation eased this month, official data showed today, after similarly benign readings elsewhere across the euro zone, suggesting that price growth may be falling more quickly than expected in the 20-nation currency bloc.
The promising inflation figures, coupled with weak growth indicators, also add to the case for increased caution in European Central Bank interest rate hikes in the months ahead after the fastest pace of monetary tightening on record.
German consumer prices, harmonised to compare with other European Union countries, rose by a less-than-anticipated 6.3% on the year in May, preliminary data from the federal statistics office showed.
Analysts had expected the harmonised reading to increase by 6.8% on an annual basis. This is the lowest print since March 2022.
A new subsidised travel ticket, covering all local public transport for €49 a month, has helped to ease inflationary pressure.
Furthermore, the base effects from high energy and food prices in May 2022 disappeared from the year-on-year comparison.
National data so far suggests that euro zone inflation may have dropped more than expected in May and even underlying prices may have ticked down, supporting arguments for cautious ECB rate hikes in the months ahead.
"Clearly the decline has been bigger than what was discounted by analysts and I think that is positive news," ECB vice president Luis de Guindos said today.
The ECB has lifted rates by a record 375 basis points over the past year and has already committed to another move in June, leaving only subsequent tightening up in the air.
While many policymakers, including the influential chiefs of the German and Dutch central banks, have also put a July rate hike on the table, few if any are willing to discuss policy beyond that, arguing that inflation developments, particularly for core prices, will be key.
Core inflation, which filters out volatile food and fuel prices, has been stubbornly high in recent months, driven by increasingly rapid wage growth in services, and trends suggest that a major turnaround is likely only in the autumn.
Earlier, figures showed that inflation had eased in five economically important German states in the month of May.
The inflation rate in North-Rhine Westphalia fell to 5.7%, while in Bavaria it slowed to 6.1%, in Brandenburg to 6.3%, in Hesse to 5.9% and in Baden-Wuerttemberg to 6.6%.
In April, inflation rates for those five states, out of 16 in Germany, had been between 6.8% and 7.6%.