German Inflation Rate Unexpectedly Held Steady at 2.2% in May

German inflation unexpectedly held steady in May even as energy prices retreated and the sovereign debt crisis in the euro area clouded the economic outlook.

Inflation, calculated using a harmonized European Union method, stayed at 2.2 percent, the Federal Statistics Office in Wiesbaden said today, revising up a May 29 estimate of a decline to 2.1 percent. One of 17 economists surveyed by Bloomberg News predicted the revision. Prices dropped 0.2 percent in the month.

German inflation has slowed from 2.9 percent in October as oil prices decrease and Spain’s banking woes and uncertainty about Greece’s future in the euro area weigh on business and investor confidence. Still, price pressures may develop as unions win above-inflation wage raises and unemployment at a two-decade low bolsters consumer spending.

“German inflation is slowing down mainly because of decreasing energy prices,” said Aline Schuiling, an economist at ABN Amro Bank NV in Amsterdam. “While the intensification of the euro crisis damps German growth prospects in the coming quarters, the tight labor market and rising wages mean that underlying inflationary pressures are slowly building up.”

Non-harmonized German inflation slowed to 1.9 percent in May from 2.1 percent in April, with prices declining 0.2 percent in the month, today’s report showed. Excluding energy costs, prices rose 1.5 percent in the year and remained unchanged from April, the statistics office said.

Factory orders and industrial production fell more than economists forecast in April and exports declined, adding to signs that the German economy may be cooling. The country’s economy expanded a better-than-expected 0.5 percent in the first quarter, helping the 17-nation currency area avoid its second recession in three years.

The European Central Bank kept its benchmark interest rate unchanged at a record low of 1 percent last week and projected euro-area inflation to stay above its 2 percent target this year. While the central bank forecasts the euro economy will shrink 0.1 percent in 2012, unchanged from a March estimate, ECB President Mario Draghi said on June 6 that downside risks to the economic outlook have increased and left open the possibility of further action.

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