Germany Inflation May 2008

Inflation accelerated in May in Germany as the cost of oil hit ever higher levels. Consumer prices, according to the European Union harmonised methodology, was up by 3.1 percent year on year, according to data from the Federal Statistics Office. That's slightly above the initial estimate of 3 percent made on May 28. Month on month prices rose 0.7 percent.



Oil prices reached a record $139.12 a barrel last week and European Central Bank President Jean-Claude Trichet indicated that the ECB may raise its benchmark rate by a quarter-point to 4.25 percent next month to contain inflation.

German inflation has now exceeded the ECB's limit of a rate "close to but below 2 percent" for over a year and even the strong appreciation in the euro has failed to offset higher oil and food costs. While the euro rose 8 percent in trade-weighted terms over the past year, oil prices doubled.



The price of fuels rose as much as 12 percent from a year earlier. Diesel jumped 26 percent and the cost of light heating oil surged 57 percent in May, the statistics office said. Food prices rose 7.9 percent compared with May 2007.

ECB policy makers have been becoming increasingly concerned that inflation expectations are on the rise. Expectations, as measured by the so-called breakeven on five-year French inflation-indexed bonds, were at 2.4 percent today, up from 2.12 percent in March.

The ECB currently predicts inflation in the euro region will average about 3.4 percent this year and slow to 2.4 percent in 2009. Economic growth is forecast to slow to 1.8 percent in 2008.

So while economic growth is cooling in EU countries, the ECB remain focused on price stability, and investors now expect the ECB to lift its repo rate twice this year, taking it to 4.5 percent, according to Eonia forward contracts.

However, according to the latest data from the German statistical office wages were rising at a slower rate than inflation in the first quarter of 2008, since employers in the industry and service sectors paid a calendar-adjusted 1.7% more for one hour worked than in the same quarter a year earlier. The two main components of labour costs showed different trends: The increase in gross wages and salaries accelerated slightly to 2.3%. However, non-wage costs declined 0.1%, which had a downward effect. This trend reflected above all the change in the rate of employers’ contributions to the unemployment insurance scheme. As of 1 January 2008, the rate was reduced from 2.10% to 1.65%.