Consumer prices: will German inflation ease off soon?

Status: 23.11.2022 8:18 a.m

According to some experts, the peak of inflation in Germany could soon be reached. There are increasing signs that the inflation rate will fall noticeably in the coming year. An overview.

At 10.4 percent, the inflation rate in Germany is currently at its highest level since 1951. Prices have been rising for around two years, for primary products such as raw materials and industrial products, as well as for numerous everyday items. According to a study by the consulting firm EY, every second consumer now says they only buy the essentials.

However, there are now signs that the pace of inflation could soon slow down. In October, producer prices stopped rising for the first time since 2020. Compared to the previous month, they even fell by 4.2 percent, as the Federal Statistical Office announced this week.

A recession leaves its mark

According to Ralph Solveen, economist at Commerzbank, the latest producer prices give “hope that consumer prices will also peak in the inflation rate.” Producer prices are the prices that manufacturers charge for their products. If they fall, this also has an effect on consumer prices – with some delay they also fall. Jens-Oliver Niklasch from Landesbank Baden-Württemberg also sees a good sign in the figures: “Perhaps the first sign of a certain easing of price pressure caused by the economy.”

The trend in wholesale prices also gives cause for hope: They have fallen compared to the previous month – albeit only slightly by 0.6 percent. According to the Federal Statistical Office, this is mainly due to the fact that petroleum products have become noticeably cheaper by around five percent.

Economists also expect that Germany will be hit by a slight recession in winter. For example, the industrialized countries organization OECD predicts a decline in German economic output of 0.3 percent for 2023. According to the International Monetary Fund (IMF), this could apply to large parts of the global economy in the coming year. The weak economy could also lead to a reduction in price pressure and inflation.

According to Blanchard, inflation will soon be at 3 percent

The economist Olivier Blanchard goes further than other experts in his forecast. The former IMF chief economist said in an interview with “Manager Magazin” that inflation will probably be “a matter of two years”: “My guess is that the inflation rate will be 2.5 to 3 percent at the end of 2023,” he said the economist. He believes that further government spending to deal with the current crisis is manageable: “There is scope for programs to protect against high energy prices.”

In Germany, for example, it has been planned so far that the gas and electricity price brake will come into force from March – which should then also relieve households and smaller companies retrospectively from January 2023. And Federal Minister of Finance Christian Lindner wants to create incentives for investments through further tax relief.

Relief will not take effect until next year

But despite the signs of hope, many experts warn against giving the all-clear too quickly. After all, the effects of falling wholesale and consumer prices only reach consumers with a delay. The state aid will only really take effect in the coming year. And there are still imponderables on the energy markets. For example, refilling the gas storage tanks in the coming year is likely to be a challenge.

That’s why the inflation problem is probably not yet solved, estimates Ralph Solveen from Commerzbank: “Because with the sharper rise in wages, companies are facing a further increase in costs, which they will at least partially pass on to their customers,” says the expert. Employers and trade unions recently agreed on a total wage increase of 8.5 percent for employees in the metal and electrical industry in the southwest.

Joachim Nagel, President of the Deutsche Bundesbank, does not believe that inflation has yet peaked. Reliable data suggest that the inflation rate will remain at a high level for a while before it then goes down more significantly: “I think it’s likely that the average for the year will be a seven in front of the decimal point,” said Nagel with a look to 2023.

What is the ECB doing?

Meanwhile, a debate erupts among ECB members about how best the European Central Bank should act in the current environment of high inflation. For example, Austria’s central bank chief Robert Holzmann supports another jumbo interest rate hike at the upcoming ECB interest rate meeting in December. Another sharp rate hike “would give a strong signal of our determination,” he told the Financial Times. At the beginning of November, Joachim Nagel also spoke out in favor of further interest rate hikes.

Philip Lane, chief economist at the ECB, on the other hand, no longer sees a “platform for considering a very large increase, such as 75 basis points”. He said so in an interview with the news agency Market News. Of Reuters Economists surveyed assume that the ECB is likely to raise interest rates by 0.5 percentage points at its meeting in December. The key interest rate is currently 2.0 percent.

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