German producer prices have fallen more than expected, indicating that inflationary pressures are fast dissipating in Europe’s largest economy.
The 6 per cent drop in prices charged by companies for goods rolling off the production line in the year to July is the fastest since 2009. It was driven mainly by sharp falls in wholesale energy prices, according to data from the federal statistical agency.
Economists polled by Reuters had predicted a fall of 5.1 per cent. The month-on-month decline of 1.1 per cent was also larger than the 0.2 per cent fall they forecast.
Oliver Rakau, an economist at consultancy Oxford Economics, said the data “offers further support to our view that there should be significant progress on the disinflationary front in the remainder of 2023 as lower producer prices feed through, especially to consumer energy and core goods prices with a lesser impact on core services”.
About 40 per cent of German producer prices are now lower than the elevated levels reached last year. Energy producer prices dropped 19.3 per cent. Prices of intermediate goods, such as metals, wood and fertiliser, also fell year on year.
But food producer prices rose 9.2 per cent, while prices of durable consumer goods, such as furniture and appliances, and capital goods, such as machinery, were also higher than a year ago.
The European Central Bank’s governing council is looking for signs of whether its unprecedented increase in interest rates to a 22-year high has done enough to bring consumer price inflation down from its highest level for a generation back to its 2 per cent target.
The first fall in German producer prices since October 2020 would “add weight to the arguments by those in the ECB council that favour a pause or at least a skip at the September meeting as inflation worries ease and growth concerns strengthen”, Rakau said.
However, like many economists, he predicted the ECB would still raise its benchmark deposit rate again to 4 per cent at its next policy meeting on September 14, “given the labour market and services inflation resilience and wage dynamics”.
Goldman Sachs said in a note to clients on Monday that it expected annual core eurozone inflation — which strips out volatile energy and food prices — to remain above 5 per cent until September and to only fall to 4 per cent by the end of the year as high growth in services prices partly offsets falling goods prices.
Eurozone wages have been rising almost 5 per cent year on year, according to Eurostat, the EU statistics office. This should help wage growth to turn positive in real terms again this year, as headline inflation continues to fall, giving a boost to consumer spending power along with government support that could keep price pressures elevated.
Piet Haines Christiansen, director of fixed income research at Danske Bank, said the fall in German producer prices was “an important prerequisite for getting inflation quicker in line with target”. But he added: “If consumer activity is still decent, inflation will not fall as much and quickly as needed.”
Source: Economy - ft.com
