German Producer Prices fall at fastest rate since 2009

German Producer Prices fall

German Producer Prices fall at fastest rate since 2009 – German producer prices have shown a steeper than anticipated decline, indicating a swift alleviation of inflationary pressures within Europe’s largest economy. The significant drop of 6 percent in prices charged by companies for goods produced in the year leading up to July marks the most rapid decrease since 2009. This deflationary trend has been predominantly driven by substantial reductions in wholesale energy prices, as per data released by the federal statistical agency.

Economists Predicted

Economists surveyed by Reuters had originally projected a 5.1 percent decrease, underscoring the unexpectedly pronounced nature of the decline. The month-on-month reduction of 1.1 percent was also notably larger than the 0.2 percent drop that the same economists predicted.

Oliver Rakau, an economist at consulting firm Oxford Economics, interprets this data as support for the possibility of substantial progress in curbing disinflation for the latter half of 2023. He predicts that lower producer prices will translate into diminished costs for consumer energy and core goods, with a comparatively minor impact on core services.

A considerable 40 percent of German producer prices are now lower than the elevated levels recorded the previous year. Notably, energy producer prices have experienced a sharp 19.3 percent decline. Prices for intermediate goods such as metals, wood, and fertilizers also exhibited year-on-year declines.

Comparing to last year

However, in contrast, prices for food producers surged by 9.2 percent. Similarly, prices for durable consumer goods like furniture and appliances, along with capital goods such as machinery, demonstrated higher prices compared to the previous year.

This decrease in German producer prices marks the first since October 2020. Given that the European Central Bank’s governing council is intently observing developments following their decision to raise interest rates to a 22-year high, this decline may influence discussions surrounding the need for a potential pause or even a deferral during the September meeting.

Despite this, economists like Rakau and others anticipate that the ECB will continue with its plan to raise its benchmark deposit rate to 4 percent during the upcoming policy meeting scheduled for September 14. This prediction takes into account the resilience of labor markets and service inflation, along with wage dynamics.

Goldman Sachs forecasts that core eurozone inflation, which excludes volatile energy and food prices, will likely remain above 5 percent until September. Moreover, it’s anticipated to decrease to 4 percent by year-end due to robust growth in services prices mitigating the impact of declining goods prices.

With Eurozone wages experiencing a nearly 5 percent year-on-year rise, there is potential for wage growth to regain positive traction in real terms this year. As headline inflation continues to wane, this could bolster consumer spending power, coupled with governmental support that has the potential to maintain elevated price pressures.

Piet Haines Christiansen, Director of Fixed Income Research at Danske Bank, views the fall in German producer prices as a crucial step towards aligning inflation more closely with targets. However, he also underscores the importance of sustained consumer activity, noting that if it remains robust, inflation may not decrease as rapidly as required.