According to the first estimate, which is based on 6 of the 16 German states, German CPI inflation slowed unexpectedly in May. The annual rate of inflation slowed from 2.2% Y/Y to 2.1% Y/Y, while the consensus was looking for a stabilization. On a monthly basis, CPI dropped by 0.3% M/M, while prices were forecast to stay unchanged from the previous month.
According to the details of the different state date, prices of transportation, household energy, clothing & footwear, leisure and communication dropped in May, while prices of hotels and restaurants rose in all states. Prices of food rose also in a number of member states. German inflation is now nearing again the ECB’s 2%-target. The euro zone inflation rate is still significantly higher, but is forecast to drop too, giving the ECB room to cut rates to fight the debt crisis and a rapidly weakening economy.