Inflation drops to 22-year low

For May, economists had expected inflation of 0.2 percent on a 12-month basis. In April, inflation stood at 0.7 percent in Europe's biggest economy.

Compared with April, May consumer prices fell 0.1 percent, the Destatis national statistics office said, based on preliminary results from six representative German states.

The last time the 12-month figure was this low was in May 1987 in what was then West Germany.

"It should be taken into account that the strong decrease is mainly due to the marked price rises for ... oil products observed in the first half of 2008," Destatis said.

Oil prices spiked early last year and a comparatively sharp drop since then has caused inflation to plummet.

UniCredit economist Alexander Koch noted that "underlying inflation should continue its coordinated downward trend for the rest of this year" because "massive excess capacities worldwide and the bleak labor market outlook in Germany clearly signal abating inflationary pressures in the short term."

The German economy contracted by a huge 3.8 percent in the first quarter of 2009, the biggest blow since records began 40 years ago, but analysts believe the worst of a historic post World War II recession may now have passed.

The downturn was much worse than a 2.2 percent decline in economic activity seen in the last three months of 2008 and means the economy now has plenty of spare capacity, which normally keeps prices in check.

Rising unemployment should also limit increases in the cost of labour. Economists generally expect the 16-nation eurozone to dip briefly into a period of deflation but with oil prices headed higher as demand returns, they do not fear a prolonged period of overall price decreases.

"Policymakers will be comforted by the fact that such effects are transient and will probably continue to claim that there is no risk of a sustained period of deflation in Germany or the eurozone more generally," said Jennifer McKeown at Capital Economics.