Inflation in Germany falls to 2.3 percent in June – fuel discount and declining energy prices support the decline

„Die Inflation in Deutschland hat sich im Juni auf rund 2,3 Prozent abgeschwächt“, the report said. The decline is attributable above all to two factors: the fuel discount in effect since May and falling energy prices.

Supporting factors: fuel discount and oil price

The federal government introduced a fuel discount in May that cut the energy tax on diesel and gasoline by roughly 17 euro cents per liter. The subsidy expires this Tuesday. „Die Inflation ist im Juni vor allem wegen des gesunkenen Ölpreises zurückgegangen“, the statisticians explained. „Im Juli sollte sie aber wieder steigen, weil der Tankrabatt wegfällt."

The Bundesbank estimates the dampening effect of the fuel discount at around a quarter of a percentage point. However, according to an Ifo analysis, the relief reached consumers only to a limited extent, particularly for diesel. According to ADAC data, premium gasoline grade E10 was on average almost six percent cheaper in the first 29 days of the month than in May, and diesel almost nine percent cheaper.

Energy as a whole became only 3.4 percent more expensive in June versus the same month a year earlier, after 6.6 percent in May. In April, the figure had been roughly ten percent. Food cost 0.4 percent more than in the same month a year earlier – exactly the same rate as in May.

Core inflation remains stubborn

Prices excluding food and energy, also referred to as core inflation, rose by 2.5 (May: 2.5) percent. Services, which include restaurant visits and travel, again became 3.1 percent more expensive (May: 3.1 percent). For services such as insurance or travel, 3.1 percent more was likewise charged.

The price decline is set against the backdrop of a calming of international energy markets. The war launched by the United States and Israel against Iran at the end of February had previously driven energy prices sharply higher and led to a temporary closure of the Strait of Hormuz for oil and gas shipments. The situation has since eased: at around 74 dollars per barrel of Brent crude, oil was recently about as expensive as before the Middle East fighting, which had at times pushed oil prices above 110 dollars.

Implications for ECB monetary policy

„Die Entspannung im Iran-Konflikt hat zuletzt die globalen Ölpreise auf das Vorkrisenniveau fallen lassen. Diese Entwicklung spiegelt sich auch in den deutschen Inflationszahlen wider", said Felix Schmidt, economist at Berenberg Bank. „Die durch den Iran-Krieg ausgelöste Inflationswelle scheint sich abzuschwächen. Dies könnte der EZB erlauben, von einer weiteren Zinsanhebung im Juli abzusehen."

Against this backdrop, monetary-policy expectations are also shifting. The European Central Bank (ECB) raised its key interest rate for the first time in nearly three years in June, from 2.0 to 2.25 percent. Economist Schmidt considers a further hike in July unnecessary given the easing inflation.

Economic signals: Ifo and retail

Business sentiment has likewise brightened, according to Ifo. Ifo economic chief Timo Wollmershäuser said: „Sinkende Energiepreise, zu denen die Hoffnungen auf Frieden im Nahen Osten zusätzlich beigetragen haben, scheinen die Unternehmen zuversichtlicher hinsichtlich der wirtschaftlichen Lage gemacht zu haben". His colleague Clemens Fuest of the Ifo Institute for Economic Research simultaneously demanded: „Eine Entlastung wie durch den Tankrabatt müsse künftig eher denen mit niedrigem Einkommen zu Gute kommen."

The Ifo barometer for price expectations fell in June to 26.4 points, from 30.0 points in May. The indicator thus declined for the second month in a row. Since the outbreak of the Iran war, it remains considerably above the average of 18.3 for the 2023–2025 period. According to Ifo data, fewer companies are planning price increases: „Mit Hoffnung im Iran-Krieg planen nach Ifo-Daten weniger Firmen Preiserhöhungen."

Not all signals are unambiguous, however. Wollmershäuser warns: „Allerdings dürften die Produzenten- und Verbraucherpreise in den kommenden Monaten weiterhin steigen." Import prices have also picked up: in May, they rose as sharply as at no point since the end of 2022. In May, import prices were 6.8 percent higher than in the same month a year earlier, according to the Federal Office, driven by the oil-price shock following the Iran war and the blockade of the strait.

The Council of Economic Experts ("Wirtschaftsweise") expects a marked rise in inflation this year, to an average of 3.0 percent. Berenberg economist Schmidt, by contrast, sees good chances that the current decline will hold and that the ECB will pause in July.

Labor market remains robust

Price trends in June were also uneven in the other major euro-area economies. In France, European-harmonized consumer-price inflation (HICP) rose to 2.0 percent versus the same month a year earlier, according to a first estimate by the statistics agency Insee. Analysts had on average expected a less pronounced decline – from 2.8 percent the previous month to 2.3 percent. In Italy, inflation had still stood at 3.2 percent in May.

As the Ifo Institute further reported, retail sales in Germany have recently recovered slightly. Calendar-, price- and seasonally adjusted real retail sales rose by 1.1 percent in May compared with April, the Federal Statistical Office said on Tuesday.

Diplomatic efforts in the background

Meanwhile, unemployment in Germany fell in June by 15,000 persons versus May to 2.936 million, according to the Federal Employment Agency. The jobless rate declined by 0.1 percentage points to 6.2 percent. According to Federal Employment Agency chief Andrea Nahles, German industry is currently losing around 15,000 jobs per month, with 174,000 positions having been shed there over the past twelve months.

The situation in the Middle East remains diplomatically fragile. US President Donald Trump's son-in-law Jared Kushner and US special envoy Steve Witkoff traveled to Doha on Tuesday for talks, a spokesperson for the Qatari Foreign Ministry said. However, only meetings with mediators are planned; no high-ranking Iranian representatives are currently expected in Doha.

Consumer advocates are meanwhile criticizing the design of the fuel discount. Commerzbank chief economist Jörg Krämer cautioned that, given high core inflation, the two-month relief measure must be supplemented by further, targeted measures in order to break the stubborn services inflation.

Overall, a mixed picture emerges: inflation fell noticeably in June, supported by energy and special effects. Whether the decline will prove durable after the fuel discount expires and amid further rising import prices is, in the view of most experts, an open question.