German Inflation Unexpectedly Eased in May as Price of Crude Oil Declined

Inflation in Germany, Europe’s largest economy, unexpectedly eased in May after oil prices dropped from a 2 1/2-year high.

The harmonized inflation rate fell to 2.4 percent from 2.7 percent in April, the Federal Statistics Office in Wiesbaden said today. Economists had expected inflation to hold at the highest level since September 2008, the median of 17 forecasts in a Bloomberg News survey showed. On the month, consumer prices declined 0.2 percent.

Oil prices have dropped 11 percent this month after breaching $114 a barrel in April, leaving households with more money to spend. European Central Bank officials have signaled they are ready to raise borrowing costs further to curb price pressures after increasing the benchmark interest rate to 1.25 percent last month, even as peripheral nations such as Greece, Portugal and Ireland remain mired in a sovereign-debt crisis.

“Today’s German inflation numbers are just a temporary breather,” said Carsten Brzeski, an economist at ING Group in Brussels. “Obviously, with these inflation numbers, the ECB won’t hastily rush to a June hike. The German data is also not soft enough to put the ECB off from another hike in July.”

On a non-harmonized basis, inflation slowed to 2.3 percent in May from 2.4 percent and prices were unchanged on the month, the statistics office said.
Price Mandate

VCI, the main association of German chemical companies, on May 17 raised its forecast for production, sales and prices this year in the industry, on increasing global demand.

“We have to avoid commodity-price increases becoming entrenched in longer-term inflation expectations, which could have second-round effects on wages and prices,” ECB President Jean-Claude Trichet said yesterday. “We are carefully monitoring the situation and we stand ready to do whatever is necessary to fulfill our mandate.”

Euro-area inflation probably remained at 2.8 percent this month, according to the median of 27 forecasts in a Bloomberg survey. The European Union’s statistics office in Luxembourg will publish the data on May 31. Economists in a separate survey forecast the ECB will raise its main lending rate to 1.75 percent by the end of the year.

The German economy grew 1.5 percent in the first quarter as companies boosted spending to meet increased export demand and construction rebounded from a slump in the previous three months. The government predicts growth of 2.6 percent this year after a record 3.6 percent expansion in 2010.

At the same time, countries from Greece to Portugal are struggling to grow amid a debt crisis that’s shaking the foundations of the single currency. The euro area will grow 1.6 percent this year after expanding 1.8 percent in 2010, the European Commission forecast this month.

Source.