Key economic sign shows inflation in Europe may have already peaked

Point zero of rising prices, Europe may have reached an inflection point in its struggle to control runaway inflation.

Germany, the continent’s largest economy, accounting for around a fifth of its overall gross domestic product, said prices for industrial goods paid by producers fell 4.2% from September to October after costs fell Energy.

“This is the first month-on-month decline since May 2020,” the German statistics office reported on Monday. “Energy prices fell by an average of 10.4%, mainly due to lower prices for electricity and natural gas.”

Earlier, producer prices had risen at a monthly rate of 2.3% in September and 7.9% in August, the biggest increase since records began in 1949.

Companies are voracious consumers of raw materials, basic raw materials and other resources ranging from crude oil to galvanized steel. Any higher costs are ultimately passed on to their intermediaries and eventually downstream to the consumer where possible to protect business profits. This makes producer prices a leading indicator of inflation.

As the continent’s manufacturing power, Germany has had to absorb the brunt of soaring costs since Russia starved opponents of its war in Ukraine of natural gas.

Europe’s desperate search to secure alternative gas supplies to keep the lights on, literally, has led the continent to drive up global liquefied natural gas prices. It has since paid a high price for countries like the United States or Qatar to supply it with LNG.

During the hot summer months, when demand in the northern hemisphere was seasonally low, EU officials scrambled to ensure its gas storage was full. At the end of August, when producer prices in Germany peaked, the economic bloc had already reached its 80% target for November.

Thanks to record temperatures in October, demand was significantly lower than expected. This means that EU reserves are full to bursting, with storage capacities currently operating at 95%.

This has sent the price of gas plummeting from its summer highs as the EU can no longer absorb supplies to hoard.

Inflation still above target

Still, the annualized inflation figures are likely to remain high at least until March, as they will each be compared to the month of the previous year before prices began to soar following the start of Russian hostilities in Ukraine.

This explains why producer prices in Germany rose by nearly 35% year-on-year last month, as the energy crisis also drove up the cost of ammonia, a key raw material for fertilizers synthesized using of natural gas, almost tripled.

Adjusted for energy, producer prices rose 14% from last October and 0.4% from the previous month, according to its federal statistics office. Economists are therefore keeping a closer eye on month-to-month fluctuations.

Europe will publish at the end of the month a first estimate of consumer price inflation for November. Since it will take time, however, for the impact of lower producer prices to trickle down to the average person, consumer prices will continue to rise. The October CPI hit a record high of 10.6% for the Eurozone on an annualized basis.

Earlier this month, the European Commission forecast that consumer prices in the 20 eurozone countries sharing the single currency, including Croatia, which is due to join in January, will fall to 6.1% the next year, compared to 8.5% expected in 2022. This is significantly higher than the 2% rate targeted by the European Central Bank in the medium term.

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