The just-released flash estimate of German inflation in June signals some easing of inflationary pressures, keeping the door open to further European Central Bank rate cuts. Headline inflation came in at 2.2% year-on-year, down from 2.4% YoY in May. The European inflation measure came in at 2.5% YoY from 2.8% in May. After the reversed base effect from last year's introduction of cheap public transportation in May, inflation is mainly back to where it was in March and April.
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Today's German inflation data not only illustrates the ongoing impact of base effects and earlier government measures on present inflation but also stresses that inflation remains sticky above 2%. Judging from available regional state data, it is goods and transportation inflation as well as energy price inflation that has come down. At the same time, services inflation remains at elevated levels. Monthly changes show actual price drops in clothing as a result of summer sales, health care, transportation and energy while prices for hotels and restaurants, potentially as a result of the Euro2024, increased.
Looking ahead, the stickiness of inflation at slightly too high a level looks set to continue as favourable energy base effects are petering out while, at the same time, wages are increasing. With recent new wage demands, it is hard to see German wage growth coming down in the second half of the year.
As a result, experts continue seeing inflation hovering within the broader range of between 2% and 3% rather than returning on a straight line to 2%.
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