FRANKFURT (Reuters) - German inflation is proving stubborn, driven by a continued strong rise in wages, the Bundesbank said on Friday, a day after the European Central Bank cut interest rates on improving price growth prospects.
Inflation has come down from double-digit territory in late 2022 but the "last mile" of disinflation is starting to prove especially difficult and the warning from the euro zone's biggest economy is likely to reinforce expectations that interest rates can only come down slowly.
"Inflation is proving to be stubborn, especially in the case of services, where strong wage growth and the resulting cost pressures are major factors," the Bundesbank said in a twice-yearly update of its economic projections.
While the ECB cut rates as expected on Thursday, policymakers said they were likely to stay on hold in July. Markets only see one or two more moves this year, suggesting that high ECB rates are likely to hold back growth well into next year.
The Bundesbank appeared especially worried about the outlook for wages after a surprisingly quick expansion in the first quarter.
"Negotiated wages are expected to rise particularly sharply this year and continue to see strong growth thereafter," it added.
The bank now sees inflation for the euro zone's biggest economy at 2.8% this year after a 2.7% prediction six months ago, and at 2.7% in 2025 versus 2.5% seen earlier.
"While the inflation rate in Germany is continuing to decline, the pace is subdued," Nagel said. "We on the ECB Governing Council are not driving on auto-pilot when it comes to interest rate cuts."
The economy is meanwhile likely to only just expand this year, even if a recovery in the second half of the year is likely to accelerate, the bank said.
Growth is now seen at just 0.3% this year, below the 0.4% forecast in December, and it is then set to pick up to 1.1% next year, against the 1.2% forecast before, the Bundesbank said.
Germany's economy has struggled for much of the past year as its vast industrial sector fell into a deep recession because of anaemic export sales.
However, demand has been picking up in recent months, suggesting that the economies of Germany and the euro zone as a whole may have bottomed out and a slow, shallow recovery, long expected by policymakers, may be under way.
"The German economy is extricating itself from the period of economic weakness," Bundesbank President Joachim Nagel said in a statement.