The German central bank said that consumer inflation in the country is proving stubbornness, driven by a continued strong rise in wages. This warning from the eurozone's largest economy is likely to strengthen expectations that further easing of the ECB's monetary policy will take place at a slow pace. Currently, the market expects one or two more ECB rate cuts this year, which suggests that high rates are likely to restrain economic growth next year.
"Inflation in Germany remains sustainable, especially in the service sector, where strong wage growth and the resulting cost pressures are major factors," the Bundesbank said, adding that negotiated wages are expected to rise particularly sharply this year and continue to see strong growth thereafter.
Last week, Germany's Federal Statistical Office (Destatis) announced the country's consumer price index (CPI) is estimated to edge up 0.1% m-o-m in May after jumping 0.5% m-o-m in April. That would be the weakest monthly advance in the index since December 2023. On a y-o-y basis, Germany’s CPI is seen to soar 2.4% in May, following a 2.2% climb in the previous month. That would represent the first rebound in annual inflation in five months and mark the strongest annual increase since February (+2.5%). Economists had forecast CPI would increase by 0.2% m-o-m and by 2.4% y-o-y in May.
According to the updated forecasts of the Bundesbank, consumer inflation in Germany will be 2.8% this year (+0.1% compared to the previous forecast presented in December) and will decrease to 2.7% next year (+0.2% compared to the previous forecast). As for the economic outlook, the Bundesbank forecasts GDP growth of 0.3% in 2024 (-0.1% compared to the previous forecast) and 1.1% in 2025 (-0.1% compared to the previous forecast).