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Economists see “spectacular decline”: Producer prices fall for the first time in two and a half years

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A record drop in producer prices is raising hopes of a gradual abating of the strong inflation in Germany. In October, manufacturers lowered their prices by an average of 4.2 percent compared to the previous month, with energy costing significantly less than in September. This was announced by the Federal Statistical Office on Monday.

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“This was the first month-on-month price decline since May 2020 and at the same time the strongest since the survey began in 1949,” the authority told the Reuters news agency when asked.

The decline came as a complete surprise: economists surveyed by the Reuters news agency had expected another increase of 0.9 percent. Compared to the same month of the previous year, the inflation rate weakened to 34.5 percent, after August and September had seen the highest increases since the survey began in 1949 at 45.8 percent each.

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The development raises hopes that high inflation may have gradually peaked. “A spectacular decline after all those months of significant price increases,” said LBBW economist Jens-Oliver Niklasch. “Perhaps the first sign of some cyclical easing in price pressures.”

Similarly, the Commerzbank economist Ralph Solveen estimates. “The rate of inflation could increase by the beginning of next year, since the higher energy prices sometimes only reach households with a significant delay,” said Solveen. “However, the prices at the producer level, which are already falling significantly, indicate that this effect will probably be over in a few months.” In addition, government interventions such as the gas and electricity price brake will depress inflation in the coming year.

Producer prices are seen as a precursor to the development of the cost of living. If the producers raise or lower their prices, this usually also affects private households, at least in part.

In the statistics, the prices are listed from the factory gate – even before the products are further processed or sold. In October, consumer prices were 10.4 percent higher than a year earlier, the highest inflation rate since 1951.

Further inflationary pressures likely

However, the end consumers could not really be happy because the energy prices have fallen, especially for bulk consumers.

An Ifo survey also shows that the risk of inflation has not yet been averted. So far, German companies have been slow to pass their increased purchase prices on to their customers, and they have not passed them on in full. According to this, the companies have only passed on 34 percent of their purchase prices in the past few months, as the Munich Institute announced in its survey of 6,500 companies.

According to the companies themselves, weak demand, high competitive pressure and long-term contract terms prevented them from raising prices. By April 2023, however, they plan to increase the transmission to 50 percent. “This is likely to lead to further inflationary pressure on consumer prices in the coming months,” predicted Ifo researcher Manuel Menkhoff.

The main reason for the sharp rise in producer-level inflation is energy, which has cost significantly more since the start of Russia’s invasion of Ukraine on February 24th. Here, producer prices were 85.6 percent higher than in October 2021. Compared to the previous month of September, however, energy prices fell by an average of 10.4 percent, “mainly caused by the fall in prices for electricity and natural gas in distribution”. as the statisticians pointed out.

Light heating oil cost 76.2 percent more than a year earlier, fuel 30.8 percent more. Food was 25.1 percent more expensive than in the same month last year. The prices for butter (+66.3 percent), pork (+47.0 percent), cheese and quark (+38.3 percent) and milk (+36.1 percent) rose particularly sharply. Coffee was 29.1 percent more expensive than in October 2021.

Producer prices capture producer-level price pressure by reflecting producer selling prices. The development usually affects consumer prices, which the European Central Bank (ECB) bases its monetary policy on. In view of the high inflation, the ECB has, after some hesitation, raised its key interest rate significantly. Further rate hikes are expected. (Reuters, dpa)

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Source: Tagesspiegel

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