German inflation eases to 2.6 percent in May as temporary fuel tax cut offsets Iran war energy shock
Germany's inflation eased to 2.6% in May, but mainly because Berlin cut fuel taxes by about 17 cents a litre to blunt the energy shock from the war in Iran. Fuel still rose 18% year on year. The rebate expires at the end of June and will not be extended.
German households got a small reprieve on prices in May, but the relief is borrowed and temporary. The Federal Statistical Office confirmed that inflation eased to 2.6% year on year, down from 2.9% in April. The decisive factor was a temporary government fuel tax cut of roughly 17 cents per litre on petrol and diesel, in force from May 1 through the end of June. Without it, the picture is harsher: energy prices were still up 6.6% on the year, and fuel alone rose 18%. The driver behind those energy costs is geopolitical. The war in Iran has disrupted global oil supplies, including through the Strait of Hormuz, the chokepoint through which around a fifth of the world's oil trade passes. The German rebate, estimated at about 1.6 billion euros, was designed as a short-term cushion against that shock, and the Ifo Institute reported that oil companies have largely passed the saving on to consumers. The catch is the expiry date. The measure runs out at the end of June and is not set to be extended, which means the part of May's improvement that came from tax policy rather than markets is scheduled to reverse.