Germany faces more inflationary pressure

At the moment quite a few news strands are passing through Germany. One issue that is of particular concern to us is inflation and we have a new record to take note of.

WIESBADEN – In January 2022, producer prices for industrial products were 25.0% higher than in January 2021. As the Federal Statistical Office (Destatis) also reports, this was the highest year-on-year increase since the survey began in 1949.

There is an obvious issue here for a country which is still a large manufacturer as we mull how much of these costs will have to be passed onto consumers and how they will respond? Also it is a challenge to the latest variant of the “Transitory” theory which is that the German consumer inflation problem will fade away once the VAT changes wash out of the annual numbers.

Looking further the monthly change provided no relief at all.

Compared to the previous month, the commercial producer prices by 2.2%.

You will not be surprised to learn what has been the leader of the inflationary pack.

The price trend for energy continues to be primarily responsible for the increase in commercial producer prices compared to the previous year .

Okay by how much?

Energy prices in January 2022 were on average 66.7% higher than in the same month last year . Compared to December 2021, these prices increased by 1.3%. The highest impact on the year-on-year rate of change in energy was natural gas in distribution, up 119.0% from January 2021.

The Energy Problem

The Financial Times has looked at an issue which I would imagine occurred to most of you as soon as the Ukraine issue returned to the front pages.

Germany fears Russia could retaliate against western sanctions in the event of war with Ukraine by cutting off gas supplies, its finance minister has said, a move that could cripple Europe’s largest economy.

This would create quite a problem.

Some fear the Kremlin could respond to sanctions by reducing or even stopping gas flows to Europe, which relies on Russia for 40 per cent of its gas. Lindner’s remarks suggest such a scenario is being taken seriously in Berlin.

Whilst Ursula Von der Leyen might regard this as strange most would hardly be surprised.

“Gazprom, a Russian state-owned company, is deliberately trying to store and deliver as little as possible,” Ursula von der Leyen, European Commission president, told the Munich Security Conference on Saturday. “While prices and demand are skyrocketing, this is very strange behaviour for a company.”

Germany gets 49% of its gas from Russia and I wonder how the following can be true?

The EU has said it would be able to cope with a partial cut-off of gas and has spoken with the US, Qatar, Egypt, Azerbaijan and other countries about increasing deliveries of liquefied natural gas (LNG), either through additional shipments or contract swaps.

I am a little unclear how a contract swap would help but shipments require infrastructure and if that is in place why is this necessary?

“I’m very much in favour of Germany building LNG terminals, and have been for years,” he told the FT. “If we get LNG terminals built then that would be a positive outcome of this situation.”

Other Inflation

Actually there would be a problem even if we were not in the midst of an energy price crisis.

Excluding energy, producer prices were 12.0% higher than in January 2021 (+2.5% compared to December 2021).

Also although it is only a little higher it is true that the monthly rate of growth is faster. One particular area that has seen a lot of inflation is metal-based products.

Intermediate goods were 20.7% more expensive in January 2022 than a year earlier. Compared to December 2021, these prices increased by 3.1%. Metals overall had the greatest impact on the year-on-year rate of change for intermediate goods, up 36.9%. Here the prices for pig iron, steel and ferro-alloys increased by 51.5%, non-ferrous metals and their semi-finished products cost 28.1% more.

There are other areas seeing large price rises too.

The price increases compared to the previous year were particularly high for secondary raw materials made of paper and cardboard (+72.7%), fertilizers and nitrogen compounds (+67.4%) and packaging materials made of wood (+65.7%). Softwood lumber was 52.8% more expensive than in January 2021.

The situation with lumber has some similarities with the US.

 Here, however, prices have fallen by 24.2% since their peak in August 2021.

Also the newspaper industry is getting a rise in costs to add to its circulation problems.

Corrugated paper and cardboard, which play an important role in the packaging industry, cost 41.9% more than a year earlier. Paper and cardboard were 41.3% more expensive. Here, in particular, the prices for newsprint increased (+66.9%).

There are worrying signs for food inflation in the pipeline for workers and consumers.

Food was 8.4% more expensive than in the previous year. The prices for untreated vegetable oils rose particularly sharply (+58.5%). Butter was 61.1% more expensive than a year earlier, coffee 14.7%.

Also I think there is more to come from coffee as the ICE future is up 92% over the past year.

On Friday we noted higher furniture sales in the UK and any such trend in Germany would also face higher prices.

The prices for durable goods were 6.2% higher in January 2022 than a year earlier, mainly due to the price development for furniture (+8.5%).

Markit PMI

The flash February indicator released this morning is also picking up inflationary signs.

Inflationary pressures in the economy meanwhile remained elevated, with average prices charged for goods and services rising at a near-record rate during the month.

There is more detail here.

Strong price pressures remained a theme in
February. The overall rate of input cost inflation
was little-changed from December and January and
stronger than in any month prior to last June. The
service sector recorded a further intensification of
cost pressures, with energy, fuel, wages and
materials all cited as sources of input price inflation.

The source of pressure has switched from manufacturing to services but it remains strong.

In terms of output prices, the rate of inflation in
February was the second-strongest on record, below
only that recorded in November last year.

Comment

The issue of inflation within Germany has been of prominence even since the Weimar burst but these days the body controlling it is not solely in German hands. There was a message for the ECB in his FT interview.

Lindner said he could “understand” why the ECB had decided to gradually reduce its asset purchases if inflation remained high, noting that some eurozone central bankers, such as Nagel and Klaas Knot of the Netherlands, were talking about the need to raise interest rates. “I would certainly support a return to normalised monetary policy,” he added.

That sort of view seems to be supported by France.

FRANCE’S FINANCE MIN. LE MAIRE: FRANCE IS PREPARED FOR POSSIBLE ECB RATE HIKES. ( @FinancialJuice1 )

Of course any such action will need the support of ECB President Christine Lagarde and it was only last month it was clear she was against any such thing.

“conditions for a 2022 rate hike have not been met.”

A week ago Bloomberg reported this.

ECB President Christine Lagarde warned that the Governing Council could harm the economy’s rebound if it rushed to tighten monetary policy

I do like the idea of any move being “rushed” when the truth is that there has been an enormous amount of dithering. German workers and consumers are already paying the price of this.

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