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Shopping in the supermarket: Prices for food continue to rise above average

Photo: Frank Hoermann / Sven Simon / IMAGO

Inflation in Germany weakened significantly in May at a high level. Consumer prices were on average 6.1 above the level of the same month last year, as the Federal Statistical Office announced on Wednesday on the basis of preliminary figures.

This is the third month in a row that price inflation at the consumer level has slowed down. The last time the annual inflation rate in Germany was lower was in March 2022, when it was 5.9 percent. In April, the inflation rate was still at 7.2 percent.

The development of energy prices eased the situation, rising by an average of only 2.6 percent (April: 6.8 percent), with refueling even becoming cheaper in many federal states. The 49-euro ticket for local public transport, which was introduced at the beginning of the month, also dampened inflation, as it reduces transport costs for the already more than ten million buyers.

Food prices rose significantly again at 14.9 percent, but not as much as in April with 17.2 percent. Services cost an average of 4.5 percent more than a year earlier (April: plus 4.7 percent).

In some areas, however, price pressure remains high. Package holidays, for example, rose in price in Bavaria and Saxony by 13.6 percent each. "It turns out that after the pandemic, Germans want to enjoy life again and really go on holiday despite tight budgets," said Holger Schmieding, Chief Economist at Berenberg Bank. "This makes it easier for providers to pass on higher costs to consumers in these areas."

Economists see a step towards normalization

Economists were positive about the latest inflation data. "The renewed weakening of consumer price inflation in Germany, this time significantly, is a further step towards normalizing the inflation rate close to the European Central Bank's inflation target," said Sebastian Dullien, Scientific Director of the Institute for Macroeconomics and Business Cycle Research (IMK). It is particularly pleasing that food price inflation has also weakened and consumer prices have even declined overall month-on-month.

"This is good news," said Commerzbank chief economist Jörg Krämer. For the first time, core inflation – excluding fluctuating energy and food prices – also fell, from 5.8 percent to an estimated 5.3 percent. Inflation is likely to decline further in the coming months. "Nevertheless, an all-clear is not appropriate," said Krämer. "The rapidly rising labour costs argue against a sustained calming of inflation."

The European Central Bank (ECB) is also trying to dampen inflation with higher interest rates. Higher interest rates make loans more expensive, which can slow down demand. In the medium term, the central bank is aiming for stable prices for the euro area with an inflation rate of two percent. After seven interest rate hikes in a row, the key interest rate in the currency area of the 20 countries is now 3.75 percent, and further increases are expected.