Germany Inflation Fears on the Rise
In July 2010, German producer prices for industrial products jumped 3.7% y/y, the fastest increase since December 2008. Since the PPI measures price changes at an early stage in the production process and hence serves as an indicator for future price pressures before they trickle through to consumers, the data release stirred fears of inflation in Germany.
RGE expects the uptick in producer price inflation to remain temporary as it reflects—with a one- or two-quarter lag—the sharp increase in capacity utilization of more than 10 percentage points during the previous 12 months, which was driven by the speedy recovery in production. Since the capacity utilization rate for German industry has already returned to close to its long-term average, the sharp acceleration in producer prices will only persist for a few more months, before a significant slowdown.
Annualized Overall HICP vs Annualized Core HICP
Source: ECB
RGE expects German consumer price inflation to remain moderate in the medium term, despite elevated food and import prices and the sharp acceleration in GDP growth in Q2. In particular, the weak level of household consumption brings into question the ability of firms to push through price increases to consumers, even more so in light of the only moderate wage increases. Core inflation, which entered a trough in the summer months, will only gradually trend upwards. In mid-August 2010, Germany’s 30-year bond yield fell below 3%, suggesting that the risk of inflation remains muted. RGE expects consumer prices to rise 1.1% in 2010 and 1.5% in 2011. (See related Critical Issue on German consumer prices.)
Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: Europe Weekly Spotlight: UK and German Inflation; Turkish Monetary Policy; Nordic PMIs
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