Rising producer prices “Hidden inflation” as a warning sign

As of: 06/09/2021 1:32 p.m.

In China, producer prices have risen faster than they have been in 13 years. In Germany, too, inflationary pressure from producers is growing. When will consumers feel this? From Angela Göpfert, tagesschau.de In China, producer prices rose by 9.0 percent in May, the strongest they have been since 2008. Anyone who thinks what is happening in China does not affect the German consumer is wrong. As far away as China may feel for some German consumers: The fresh data from China are fueling the inflation debate in this country, as they reveal a problem that Germany and the euro zone are also facing.

“Hidden inflation” also in Germany

In April, producer prices in the Federal Republic of Germany soared by 5.2 percent compared to the same month last year. That was the highest increase since August 2011, when prices rose sharply after the financial and economic crisis. The producer prices are considered to be an important leading indicator for the development of consumer prices. They usually only meet with far less media interest, which is why they are sometimes referred to as “hidden inflation”.

Energy prices as a driver of inflation

So the crucial question is: Will producer price inflation also reach consumers? So far, not much of that has been felt. In April consumer prices in Germany climbed by 2.0 percent compared to the same month last year. Around half of this increase was due to the rise in energy prices. A look at the recent past of the German economy also shows that consumer prices have mostly only increased significantly at a much slower pace when producer prices have risen similarly. The producer price inflation was therefore only to a small extent reflected in rising consumer prices.

Consumers have saved a lot of money

But this time everything could be different. The reason is a special effect of the corona pandemic, which has never come to fruition in this pronounced form: the deferred demand. “The corona pandemic inhibited private demand for months and led to a kind of compulsory saving. The savings surplus now amounts to over 150 billion euros and is likely to rise to around 200 billion euros by the end of 2021,” said LBBW economist Jens-Oliver Niklasch across from tagesschau.de . This corresponds to a potential increase in consumer demand of up to 17 percent compared to the pre-Corona year 2019.

Companies can pass on more costs

“If we open everything now, then this strong additional demand will meet an offer that has become more expensive in terms of costs. The probability is correspondingly high that the companies will be able to pass on a larger part of the costs,” says Niklasch. Michael Holstein, chief economist at DZ Bank, is convinced that “the manufacturing companies will certainly try to pass on part of their cost increase to their customers.”

Savers are actually expropriated

Against this background, LBBW economist Niklasch initially expects inflation rates to continue to rise over the remainder of the year. In the second half of the year, the VAT effect should come into its own: “Then we will probably reach inflation figures of over three percent.” This has very real consequences for consumers and savers in Germany: With interest rates of zero percent and an inflation rate of over two or even three percent, the real interest rates, i.e. the nominal interest rates minus the inflation rate, are negative. Savers who invest their money in overnight money accounts or savings books are actually expropriated. This is fueling the flight into stocks and real estate, which in turn continues to inflate the price bubbles in these markets.

Wage-price spiral not yet in sight

After all: LBBW expert Niklasch sees the rising inflation rates as a temporary phenomenon, the ingredients for a permanent increase are not there. “For inflation rates to rise over the long term, wages would have to go along with them; a wage-price spiral like the one in the 1970s would be needed. But we are not seeing that in Germany at the moment.” From January 2022, the inflation rate should quickly drop below the two percent mark.

Stress on industry harms the economy

But even if the rising producer prices were not or only slightly reflected in rising consumer prices, that would not bode well. If producers cannot pass the rising prices on to consumers, that would indicate weak consumption dynamics. That seems to be the case in China at the moment, as Commerzbank foreign exchange expert Hao Zhou points out. “As a result, there is a risk that industrial profits will shrink rapidly, which will weigh on the general economic outlook.” So regardless of whether the producers pass the rising producer prices on to the consumers or not: they are always a warning signal.

Inflation in Germany is picking up speed. In March consumer prices rose by 1.7 percent compared to the same month last year, as reported by the Federal Statistical Office. This means that the rate of inflation was positive for the third month in a row after the VAT cut expired at the end of 2020. Compared to the previous month, inflation rose by 0.5 percent. In February the inflation rate was 1.3 percent.

Refueling will be expensive

In particular, the rising prices for energy have an impact on consumer prices. According to the statistics office, energy prices rose by an above-average 4.8 percent within the year. In detail, the data are even more informative: If you compare the inflation rates with the previous month of February, the plus becomes even clearer. Above all, I increased the price of heating oil by 19.4 percent compared to March. In the case of gasoline, the increase is 12.7 percent. In addition to the CO2 levy introduced at the beginning of the year, the price decline a year ago is also having an effect, as the experts note. The comparative value in the previous year was therefore low. Electricity prices, on the other hand, remained relatively constant.

Vegetables have become cheaper

Groceries have also become more expensive overall. Here the plus compared to March of the previous year is 1.6 percent. Consumers had to pay more for fruit and dairy products in particular: the prices rose by 2.5 percent each. However, compared to February, food prices remained unchanged. However, among other things, edible fats and oils have become more expensive, while vegetables have become cheaper. The European Central Bank (ECB) is keeping a close eye on inflation developments in Germany, Europe’s largest economy. It is aiming for inflation of just under two percent for the monetary union in the medium term. The German inflation rate calculated according to European standards was 2.0 percent in March.

Special factors drive inflation

Ann-Katrin Petersen, investment strategist at Allianz Global Investors, emphasizes, however, that currently there are mainly temporary special factors, which pointed to a noticeable increase in inflation rates in the coming months. The expert points to the economic slump of the previous year – and the now rising raw material prices, the noticeable catch-up effects in private consumption and possible bottlenecks in the service sector following a relaxation of the distance rules and contact restrictions. It is uncertain whether the current trend will manifest itself in the long term.