German inflation slightly increased in May, highlighting the challenge for the European Central Bank (ECB) ahead of its interest rates decision next week.

Prices rose 2.4% compared to the same month last year, preliminary figures from Germany's Federal Statistical Office, Destatis, showed on Wednesday.

In line with analyst expectations, the figure was up from 2.2% in April, and the first increase in six months.

ECB rates decision next week

Germany, the largest economy in Europe, releases its figures before the eurozone inflation data is published.

In May, German consumers experienced a 0.6% increase in food prices compared to the previous year. It is anticipated that service prices rose by 3.9%, with insurance services seeing a particularly sharp increase.

Energy costs dropped 1.1% in May compared to a year earlier, despite a return to the higher 17% of value added tax — rather than the lower 9% rate implemented on a temporary basis as costs rose — as of April 1.

The slight bump in inflation is not expected to deter ECB from beginning to cut rates at its meeting on June 6, although the bank did say its decision would be data-driven.

It has held its key deposit rate steady at 4% for the past few months, with inflation in the euro area holding steady at 2.4% in April.

Olli Rehn, an ECB governing council member and head of Finland's central bank, said on Monday that cuts could begin in June, with inflation converging towards the 2% target.

Elmar Voelker from LBBW bank told the AFP news agency that the uptick in German inflation would not change that.

"[Policymakers] had already anticipated that the inflation trend would be bumpier from now on," and they will push ahead with starting to cut, he said.

Highest quarterly real-terms wage increase since 2008

Destatis, also released wage data on Wednesday suggesting that salaries were also rising following a period of higher inflation over the last roughly two years.

Wages increased by 6.4% in nominal terms and by 3.8% after adjusting for inflation, the highest rate since 2008 when the agency began tracking the figures.

This could drive consumer prices back up Commerzbank chief economist Jörg Krämer warned.

"The inflation problem is far from being solved," Krämer told the dpa news agency.

The German government forecasts inflation at 2.4% this year, following a 5.9% rate in 2023.

lo/msh (AFP, dpa, Reuters)