10:21 AM EDT, 05/29/2024 (MT Newswires) -- The modest increase in German European Union-harmonised inflation from 2.4% y/y in April to 2.8% y/y in May reflects mainly a base effect from a cut in prices for transport services last May, said Berenberg.

Compared with April, prices rose by only 0.2%. The base effects come as no surprise, noted the bank. The resulting uptick in German y/y inflation doesn't change Berenberg's call that inflation will fall to about 2% in Q3.

The rise in German inflation to slightly above the Bloomberg consensus of 2.7% y/y doesn't stand in the way of a first 25bps European Central Bank (ECB) rate cut next week, stated Berenberg. The only question that remains is whether the ECB should follow up with a back-to-back rate cut on July 18 or wait until it can mull over new quarterly projections for growth and inflation on Sept. 12.

This will also depend on the incoming data in the coming weeks, pointed out the bank. But as eurozone inflation is currently moving sideways while wage pressures remain elevated, Bereberg continues to expect that the ECB will opt for the calmer approach and cut rates only once rather than twice a quarter to bring the deposit rate from 4.0% currently to 3.25 % at the end of this year.

For 2025 the bank forecasts three more cuts bringing the deposit rate down to 2.5 % by next summer. However, a firming economy and persistent wage pressures may then force the ECB to raise this rate back to 3% in 2026.

First details from the German national consumer price index (CPI) inflation measure -- which rose to 2.4% y/y in May, after 2.2% in April -- show that price increases were concentrated in the service sector where prices increased by 3.9% y/y after 3.4% in April. This can be largely explained by a new flat-rate monthly rail pass (Germany ticket) which was introduced in May last year, added the bank.

This cheap new ticket dampened the y/y rate of service price increases from May 2023 through April 2024. This effect has now dropped out of the y/y comparison, adding at least 0.15ppt to the annual inflation rate now. In addition, the unusually early timing of the Easter holidays and the Pentecost festivity has distorted the normal seasonal pattern of prices for package tours, dampening the y/y inflation rate somewhat in April while adding to it in May.

Adjusted for these special effects, the data shows no significant increase in inflationary pressure, according to Berenberg. Food prices rose by only 0.6% and energy prices fell by 1.1% after a 1.2% decline in April. According to regional data from North Rhine-Westphalia (NRW) -- Germany's largest state, which releases major component details earlier than the national statistical office -- fuel prices have fallen sharply, by as much as 4.6% mom for diesel and 2.4% for gasoline.

NRW's data also shows easing inflationary pressures for many services outside the transport sector. For example, prices for telecommunications services fell by 0.4% y/y in May, after rising by 0.8% in April.