Germany: May inflation rate drops to 6.1%

Berlin: German inflation fell in May partly because of lower energy costs, official data published on Wednesday showed.

The annual inflation rate in Europe's biggest economy dropped to 6.1%, down from 7.2% in April, federal statistics office Destatis said in provisional figures. Analysts surveyed by FactSet had expected a higher May reading of 6.4%.

According to Destatis, price increases at the consumer level have been slowing down for the third month in a row. 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 had been above 8% from August 2022 through March this year.

Government relief measures also helped in lowering energy prices down from their peaks in recent months, striving to soften the blow on consumers and businesses. However, the cost of groceries continued to rise faster than average in May compared to the year before, Destatis said.

According to the federal office of statistics, one possible explanation for reduced inflation in the services sector was the introduction of a new flat-rate monthly rail pass costing €49 (roughly $52), meaning some people were saving money on rail fares.

Higher interest rates to fight inflation are "testing the resilience" of eurozone 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 can reveal vulnerabilities in the financial system," ECB vice-president Luis de Guindos said in a statement accompanying the Financial Stability Review.

The ECB raised its benchmark interest rates by 3.75 percentage points since last July in an attempt to curb rapidly rising consumer prices in the 20-nation currency club. This follows almost 15 years of unprecedented rates at or near 0% in the aftermath of the financial crisis.

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

Although economic conditions have "improved somewhat" and energy prices have fallen, higher borrowing costs and tighter credit conditions are "testing the resilience of euro area firms, households and sovereigns," the twice-yearly report said.

Demand for new loans, especially mortgages, fell sharply in the first quarter of 2023, it said. However, the current "correction" in housing markets "could turn disorderly if higher mortgage rates increasingly reduce demand", the report warned.

Financial markets and investment funds were also "vulnerable to disorderly adjustments", it said, "particularly in the event of renewed recession fears."

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