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Germany’s annual inflation recorded its first increase of 2024 in May, aligning with economists’ forecasts.

According to preliminary data published by the Federal Statistical Office (Destatis) on Wednesday, the consumer price index surged by 2.4% in May 2024 compared to the previous year, up from the 2.2% rate in April and matching the expected 2.4% rise.

On a monthly basis, inflation advanced at a modest 0.1% pace, the lowest increase since December 2023, decelerating from the previous 0.5% growth and falling below the anticipated 0.2%.

Services were the primary contributor to the consumer spending basket, rising by 3.9% year-on-year. The energy goods index declined by 1.1% annually, while the food index increased by 0.6%, remaining well below the general price rise rate.

The core inflation rate, excluding food and energy, held steady at 3.0%, unchanged from April.

Figures for the states were mixed, with annual inflation rising in Bavaria, Saxony, and North Rhine-Westphalia, but falling in Brandenburg and flattening in Hesse and Baden-Württemberg.

The harmonised index of consumer prices – which excludes owner-occupied housing and certain other expenses for EU-wide comparison – saw a 2.8% growth in the provisional reading, up from 2.4%, slightly surpassing the expected 2.7%.

On a monthly basis, the harmonised consumer basket advanced as expected by 0.2%, down from the previous 0.6%.

Germany’s consumer morale improves

On the same day, the GfK released an update on Germany’s consumer sentiment gauge, noting further improvement heading into June.

Overall, the consumer climate has improved for the fourth consecutive month. The June forecast shows an increase to -20.9 points, marking a 3.1-point improvement from the previous month (revised to -24.0 points), surpassing market expectations of -22.5.

Notably, this reading represents the highest value since April 2022.

The survey indicates that Germans’ assessment of the economic outlook is clearly improving, with income expectations rising moderately and a significant decrease in their willingness to save. However, their willingness to buy is only increasing slightly.

“Falling inflation rates combined with considerable wage and salary increases strengthen consumer purchasing power. This stimulates income expectations and also reduces consumer uncertainty, which was responsible for the comparatively high willingness to save in previous months,” explains Rolf Bürkl, a consumer expert at the Nuremberg Institute for Market Decisions, the founder of GfK.

Market reactions

German bond yields held broadly steady after the inflation release, witnessing a slight uptick in the morning following the GfK consumer climate update.

Bund yields were up 4 basis points for the day to 2.65%, on track to close the session at the highest level since mid-November 2023.

The DAX index suffered another day of losses, down 0.9% after falling 0.6% on Tuesday. Commerzbank, Rheinmetall, Siemens Energy, Infineon, Deutsche Bank, and Porsche AG were the worst performers of the day, with declines between 2% and 3%. Retailers Adidas and Zalando outperformed, up 1.6% and 1.3%, respectively.

The euro held broadly flat against the dollar at a rate of 1.0845. Recent statements from European Central Bank policymakers have strongly indicated that a 25 basis point rate cut in June is now a done deal.

Money markets are currently pricing in a total of 63 basis points of cuts by the end of the year, suggesting the expectation of only two fully-priced rate reductions.

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According to a Reuters poll of 82 economists, 55 expect Frankfurt to implement two additional rate cuts after June this year.

On Friday, Eurostat will release the preliminary inflation data for this month. Economists anticipate a slight increase in the headline index, from 2.4% in April to 2.5% in May, and an uptick in the core component, from 2.7% to 2.8%.