The just-released flash estimate of German inflation in May illustrates the stickiness of inflation in the entire eurozone. Headline inflation came in at 2.4% year-on-year, up from the 2.2% YoY in April but still below the 2.5% YoY recorded in February. The European inflation measure came in at 2.8% YoY from 2.4% in April. The increase in headline inflation was mainly triggered by higher services inflation as a result of a reversed base effect from last year's introduction of cheap public transportation. Most other components saw mainly stable inflation rates.
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Remember that the main differences between the German national and the European inflation measures are varying weights for individual consumer goods and the fact that the national measure includes prices for gambling and owner-occupied housing.
Inflation remains sticky
Today's German inflation data not only illustrates the ongoing impact of base effects and earlier government measures on present inflation but also stresses how sticky inflation remains. That stickiness looks set to continue as favourable energy base effects are petering out while, at the same time, the economy is gaining traction and wages are increasing.
Earlier today, the statistical office reported the highest increase in real wages since 2008, up by 3.8% year-on-year in the first quarter. The stickiness of inflation is also reflected by companies' selling price expectations, which in manufacturing have stabilised slightly below historical averages and, in the services sector, clearly above. As a result, analysts 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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