Germany Suffers Emerging Market-Style PPI Spiral

Producer prices in Germany soared last month. To the extent “soared” can be an understatement, consider it such.

Inflation in Europe is now largely out of the ECB’s hands. When an exogenous, existential energy shock comes calling, the only policy that matters is fiscal policy. Because the situation is urgent, fiscal policy in this case means bailouts and, in all likelihood, nationalizations.

The thesaurus is now well and truly exhausted when it comes to sensationalizing German PPI prints. And that’s actually fine because they’re sensational enough on their own.

One popular strategist last month called July’s PPI data out of the world’s fourth-largest economy “apocalyptic.” If a 37% 12-month increase presaged the end times, I’m not sure what we’re supposed to say about August’s 45.8% increase (figure below).

If you’re wondering whether consensus was close, the answer is “no.” Economists expected a comparatively “cool” (try not to laugh) 37% YoY increase.

What you see in the chart is the stuff of emerging markets. Vladimir Putin is attempting to plunge Germany into a less developed state by depriving the industrial powerhouse of energy. In August, European natural gas prices went parabolic as the Kremlin turned the screws, announcing maintenance on the Nord Stream which presaged a complete shutoff. Year-ahead power prices in Germany rose on a 90-degree angle — “full GameStop,” as I put it.

Germany’s efforts to find a solution to the crisis entail rescuing energy providers, most notably Uniper, from the crippling cost of procuring lost Russian volumes in the spot market. Whether end customers should be compelled to absorb higher energy costs was a point of contention over the summer as bailout talks proceeded. The Olaf Scholz government this month unveiled a new €65 billion plan to shield households from the fallout, bringing the total across a trio of relief packages to some €100 billion.

Producer prices for electricity rose almost 175% YoY last month, Tuesday’s data showed. Prices were 26.4% higher from July. Energy prices rose 139% on a 12-month basis.

“Electricity redistributors had to pay 278.3% more than in August of 2021,” Germany’s federal statistics office said. Natural gas distribution prices rose almost 210%. Power plants were forced to pay 269% more for natural gas compared to August of 2021. Industrial consumers’ prices skyrocketed 265%. There’s no point in making charts for those figures. They’re… well, apocalyptic.

Nomura’s Charlie McElligott called the overall MoM print a “disaster.” Producer prices in Germany rose 7.9% from July (figure below).

That’s arguably more harrowing that the YoY reading. By comparison, the average monthly PPI print in Turkey this year is around 7%.

Again, the above is the stuff of emerging markets. Consumer prices in Germany aren’t done rising. New records await.

The ECB, like Germany without gas, is powerless.


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6 thoughts on “Germany Suffers Emerging Market-Style PPI Spiral

  1. Germany has no out. They were too trusting of Russia, and were too reliant on russian gas. I thought it was foolish at the time to shut decent nuclear plants with low carbon footprints due to Fukushima. The decision now looks woeful. The only solution is mitigation and a robust policy of conservation for Germany.

    1. They certainly brought it upon themselves. Trusting the Russians after 2014 was bonkers. I really really would like to understand how otherwise smart people made the decision to keep relying on Russia past that point.

    2. Of course, but we (western countries) have all made a lot of mistakes since 2014. The mistake now would be to leave Germany, and the rest of our allies in Europe, to shoulder the burden alone. We are at war with Putin. It just happens that Ukraine is supplying all of the troops and suffering all of the (physical) damage. The US should do everything in its power to mitigate the pain that the German people are feeling.

      1. I’m not disagreeing. Just as bailing out banks in 2008, there’s a point where you got to do what you have to to save the system.

        But, for the avoidance of constant repeat, we need to do 2 things on top. One, understand why the mistake was made and, two, punish the people who made that mistake.

        Again, this isn’t some esoteric stuff no one could have foreseen or even a cost/benefit analysis/choice gone wrong. This was stuff so obvious we all saw it. I’d like to think we’re smarter than the average voter but we shouldn’t be head and shoulders above European heads of state.

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