German inflation still on the rise | Instantaneous

German inflation could enter double-digit territory this summer

We stopped digging for illustrations from when inflation in Germany was at comparable levels. Put it this way: most citizens and policy makers have hardly ever seen this kind of inflation rate in their working lives.

Of course, the surge in headline inflation is still primarily driven by energy and commodity prices. However, looking at available regional data, the pass-through of these higher prices throughout the economy is in full swing. In some regional states, food inflation was already reaching double-digit levels and prices for vacation packages, leisure activities, hotels and more general services have accelerated in recent months. The inflation rate for these items is well above the European Central Bank’s 2% target. In fact, in March, only 21 of the 94 major components of the German inflation basket had inflation rates of 2% or less.

Going forward, with the war in Ukraine and continued tension and upward pressure on energy, commodity and food prices, headline inflation in Germany will pick up further in the coming months. In this regard, it is interesting that the ECB has today published an analysis of why its inflation forecasts have been so wrong over the past few years. The ECB attributes this mainly to energy prices and to the fact that the oil price futures that the ECB uses as technical assumptions have not been good predictors of the actual evolution of oil prices. energy. What the ECB does not address in its analysis, however, is the impact of higher energy and commodity prices on other prices. We still believe that the underestimation of these transmission effects is the main reason for the ECB’s misjudgment on inflation since the pandemic. The ECB simply underestimated that post-lockdown demand would be so strong that producers would not have to cut profit margins to absorb higher costs. Instead, they were able to pass on all the higher costs to the consumer. With that in mind, we probably haven’t seen the last forecast error.

We believe that transmission to all kinds of sectors is still in full swing. Add to this the additional price increases in the hospitality, culture and leisure sectors after the end of the lockdowns and it is difficult to see inflation falling significantly anytime soon. Against the backdrop of recent geopolitical events, we now expect German inflation to average over 8% this year, with a possibility that monthly inflation rates will enter double-digit territory this summer. .

James R. Rhodes