German PPI Stops Falling and Flatlines – Is That Good Enough?

Global inflation trends have been in concert for major money center countries/areas- excluding Japan, of course. Inflation flared after Covid struck and in the wake of the Russian invasion of Ukraine. It continued to ramp up more than central bankers thought. Interest rates were raised from very low levels- the U.S. led the pack in terms of rate hike speed, getting its key rate up to its prevailing inflation rate in record time after a long period of being asleep at the switch. It said it stood prepared to hold rates ‘higher longer.’ Then the next unexpected thing happened; inflation fell sooner and more sharply than expected and it did this globally, not just in the U.S. However, we are now into phase three of this process: inflation went up more and longer, inflation then fell more and faster and now inflation is off peak but not back were we want it—and it is looking stubborn. This is more or less a global money center country/area description of inflation. Inflation that went through its boom-bust phase, as you clearly see from the sequential growth rates of the German PPI is now up from its lows. The headline price level is falling but losing momentum. The core PPI is only falling in its ‘legacy’ 12-month rate.

German PPI inflation falls by 2.8% over 12 months, falls at a 3.4% annual rate over six months, and falls at a 1.2% rate over three months. Core PPI inflation falls by 0.7% over 12, months then rises at a 0.7% annual rate over six months and three months. The core points the way for trend.

The NSA (not seasonally adjusted) sequential data show acceleration across and three major PPI sectors: consumer goods, investment goods and intermediate goods. Prices only fall over 12 months for intermediate goods. All other sectors trends show increases by period and all show acceleration in progress.

German CPI data show higher inflation over three months than over 12 months for the headline and the core with a dip in between – not a steady state acceleration but a clear hint at where things are headed and with German inflation rates clearly above the EMU-wide 2% mark.

Summing up Inflation is now a major issue. Growth is struggling but depending on the country it is limping by and showing some signs of improving. While that is good for growth, it can’t be good for over-the-top inflation. Inflation does not just need to stabilize; it needs to fall. PPI inflation is running below the ECB target pace for the euro area (a target that applies to the HICP), but PPI inflation does not include the service sector where the inflation problem resides in its greatest intensity. The PPI does not have a target or even a specific benchmark. The key to the future will be service sector inflation that is high and falling slowly. The trends for inflation in the PPI and CPI are going to be trends we will have to watch closely. Of course, the official target is for the HICP and for the euro area-wide HICP; the ECB has no targets by country or for other price indexes. But every new report matters. The German HICP report carries a great weight in the ECB scheme of things. Right now, it appears that inflation progress is slowing and may even be backtracking. If so, the outlook for rate cuts, that is still widely held, could be in jeopardy.