Preliminary regional figures released on May 29 indicate that inflation moderated in four of Germany's largest states in May, a development that could translate into a lower national inflation rate for the month despite upward pressure on energy prices from the Iran war.
According to the early data, Bavaria's inflation rate dropped to 2.6% in May from 2.9% in April. North Rhine-Westphalia recorded a fall to 2.4% from 2.7%, Baden-Wuerttemberg moved down to 2.4% from 2.6%, and Lower Saxony's rate declined to 2.7% from 3.0% the previous month.
Those regional softening trends come against a backdrop in which the conflict in Iran has pushed energy and raw material prices higher in recent months. The German government has responded to the changing price environment by revising its inflation outlook, now expecting inflation to accelerate to 2.7% this year and to reach 2.8% in 2027.
Economists polled are forecasting a harmonised national inflation rate for Germany of 2.8% in May, down from 2.9% in April. National-level consumer price figures were scheduled for release later on the same Friday, which will confirm whether the regional declines carry through to the whole economy.
The German preliminary readings arrive ahead of a separate inflation report for the euro zone due on Tuesday. Economists polled expect inflation across the euro area to come in at 3.3% in May, up from 3.0% in the prior month.
Monetary policy considerations remain in focus. The European Central Bank held interest rates steady at its April meeting. However, the recent uptick in bloc-wide inflation increases the likelihood that the bank will move from warnings to concrete policy measures in its next meeting.
Summary of immediate developments
- Four large German states reported lower inflation rates in May compared with April.
- Government forecasts show projected acceleration in headline inflation for the near term and into 2027.
- Euro zone inflation is expected to rise in May, and the ECB's next policy decision is being watched closely.