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German inflation eases to 2% in June, defying forecasts
German inflation eased in June, preliminary data from the federal statistics office showed today, despite forecasts suggesting a slight increase in price pressures in Europe's largest economy.
German inflation fell to 2% year on year. Analysts polledby Reuters had forecast EU-harmonised inflation increasing from the previous month to 2.2%.
Germany's core inflation rate, which excludes volatile food and energy prices, eased to 2.7% in June from 2.8% the previous month.
The German data comes ahead of the euro zone inflation release tomorrow. Inflation in the bloc is expected at 2% in June, the European Central Bank's goal, up from 1.9% the previous month, according to economists polled by Reuters.
Data published on Friday showed that EU-harmonised inflation rose in France and Spain. Inflation was unchanged in Italy, data showed today.
Overall, the figures add to the evidence that inflation in the euro zone has sustainably returned to the target, said Franziska Palmas, senior Europe economist at Capital Economics.
"Barring a renewed surge in energy prices we expect the headline rate to average 2% this year and the ECB to make one final rate cut in September," Palmas said.
The ECB cut interest rates at the beginning of June but hinted at a pause in its year-long easing cycle.
"The German figure signals to the ECB that it has done its job," said Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe, who forecast the inflation rate in Germany would remain at 2% or even dip lower in the coming months,"right where it is supposed to be."
Inflation data show that German energy prices fell by 3.5% in June compared to the previous year.
While food prices rose 2%, that marked a significant decline from the 2.8% year-on-year increases recorded in May and April.
Services inflation, which has been stubbornly high, fell to 3.3% in June from 3.4% in the previous month.
"People may still complain about service prices, but due to the relief from energy prices, their still-high increase is hardly noticeable," said Krueger.
Despite the positive developments, Commerzbank's chief economist Joerg Kraemer warned that core inflation could remain higher than targeted "for longer than the ECB intends" due to the emerging economic recovery in Germany.
German retail sales in surprise 1.6% drop in May
Earlier figures showed that German retail sales unexpectedly fell by 1.6% in May compared with the previous month, dampening hopes for strong growth in the second quarter for Europe's largest economy.
Analysts polled by Reuters had predicted a 0.5% increase, after sales declined by 0.6% in April.
While there could be some recovery in June, a large and sustained jump in consumption is not expected for the time being, said Hauck Aufhaeuser Lampe economist Alexander Krueger.
That could spell problems for economic growth in the second quarter after unexpectedly robust growth in the first, thanks in part to consumer spending.
"The strong growth seen in the first quarter will not be repeated," said VP Bank economist Thomas Gitzel.
"The German economy will have to scale back its ambitions in the second quarter," he added.
Consumer sentiment in Germany dipped to -20.3 points heading into July in the most recent survey conducted by the GfK market research institute and the Nuremberg Institute for Market Decisions (NIM).
That survey of around 2,000 people found an increased willingness to save - due to continuing uncertainty - was counteracting positive momentum in income prospects.
