Surprising drop in producer prices in Germany

German manufacturers suddenly cut their prices in October for the first time in two and a half years. Are these the first signs of a change in trend for consumer prices as well?

In Germany, producer price growth fell sharply. In October, producer prices rose by 34.5 percent compared to a year earlier, the Federal Statistics Office announced. But a month ago, the inflation was significantly higher at 45.8 percent.

However, on a monthly basis, producer prices fell by 4.2 percent. This was the first decline since May 2020, at a time when experts expected further increases. Even in the German wholesale trade, the sharp rise in prices has moderated significantly recently.

The easing currently seen as a trend may ultimately affect consumers, as producer prices are considered precursors to changes in the cost of living.

Dramatic drop in prices

“Dramatic drop in prices after all these months of significant increases. Perhaps the first signal of a certain easing of pressure on prices, due to the economic situation,” said economist Jens-Oliver Niklasch.

Ralph Solveen, economist at Commerzbank, thinks similarly. According to this specialist, today’s figures raise hopes that the peak of consumer price inflation is not far away.

However, according to Solveen, the inflation problem is far from being solved.

“Because with the biggest increase in wages, companies face a new increase in costs, which will at least partially be passed on to their customers”, emphasizes Solveen.

Energy costs remain the price driver

The main reason for the still significant increase in producer prices, despite a decline, remains the cost of energy, which has risen since the beginning of the Russian occupation of Ukraine.

In this regard, production prices were 85.6 percent higher than in October 2021. Light heating oil cost 76.2 percent more than a year ago, motor fuels 30.8 percent more.

“Compared to last September, however, energy prices fell by an average of 10.4 percent, mainly due to lower prices of electricity and natural gas in distribution,” the statisticians underlined.

At the producer level, food products were 25.1 percent more expensive than in the same month of the previous year. The prices of butter with 66.3 percent, pork with 47 percent, cheese and quark with 38.3 percent, and milk with 36.1 percent experienced particularly significant increases. Coffee was 29.1 percent more expensive than in October 2021.

Costs have not yet been fully disclosed

A recent survey by the IFO Institute also shows that inflationary risks have not been ruled out. So far, German enterprises are passing on their rising purchase prices slowly and also incompletely to their customers.

In recent months, companies have passed on their purchase prices by only 34 percent, the IFO showed in its survey of 6,500 companies.

Weak demand, strong competitive pressure and long-term contracts have prevented companies from raising prices, according to their indications. However, by April 2023, cost tracking is planned to reach 50 percent.

“This will probably lead to further inflationary pressure on consumer prices in the coming months,” predicts Manuel Menkhoff, researcher at IFO.

However, according to the institute, there are significant differences between sectors. It is the most industry that plans to pass the higher purchase prices of energy, raw materials and materials at 68 percent, followed by construction at 66 percent. In trade, this ratio is 53 percent, while among service providers it is only 36 percent.

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