Record fall in German producer prices points to ‘big drop’ in inflation

The price of goods produced by German companies has fallen at the fastest annual rate since records began in 1949, pointing to further falls in inflation in Europe’s largest economy.

The federal statistical agency said producer prices of German industrial products fell 14.7 per cent in the year to September, dragged lower by falling wholesale energy prices.

Excluding energy, German producer prices rose 0.8 per cent from a year earlier. Producer prices are seen by economists as an indicator of future prices paid by shoppers, which are used to calculate consumer price inflation.

In a further sign of weakness in the German economy, exports of goods outside the EU declined 8.7 per cent in the year to September, with double-digit falls in shipments to both the US and China, Germany’s two main trading partners.

Germany’s economy has contracted or stagnated for the past nine months and the IMF this week predicted it would be the worst-performing major economy this year, with output contracting 0.5 per cent before returning to tepid growth of 0.9 per cent next year.

Oliver Rakau, an economist at consultants Oxford Economics, said falling exports were “another reason to expect a fairly hefty quarterly drop in German gross domestic product in the third quarter”, predicting output would decline 0.4 per cent from the previous quarter.

Other recent German economic data have also been weak, including August’s 0.2 per cent decline in industrial production from July and a 1.2 per cent decline in retail sales in the same period. Rakau said the recent “weakness” pointed to “another contraction” in fourth-quarter GDP.

Slowing economic activity is contributing to a cooling of price pressures, as shown by the 0.2 month-on-month decline in German producer prices.

Anna Titareva, an economist at Swiss bank UBS, forecast that German consumer price inflation would continue falling rapidly, dropping from 4.3 per cent in September to 3.3 per cent in October.

This would contribute to a similarly “big drop” in eurozone inflation from 4.3 per cent in September to 3 per cent in October, its lowest level since August 2021.

The German figures are due out on October 30, with the numbers for the single currency area coming the following day.

Expectations of further falls in inflation would help the European Central Bank keep interest rates unchanged when it meets next Thursday, she said.

The conflict between Israel and Hamas has raised fears of wider tensions in the Middle East and pushed up oil and gas prices in recent weeks, which economists worry could keep inflation stubbornly high.

Carsten Brzeski, an economist at Dutch bank ING, said “the disinflationary process could still gain momentum in the coming months, but looks to be shortlived” as higher oil prices meant “headline inflation would rebound in the first half of 2024”.

However, Rakau said the latest German figures highlighted “important downside risks to next year’s inflation outlook as goods deflation feeds through to consumers”.

German energy producer prices dropped 35.3 per cent in the year to September. Prices of intermediate goods, such as metals, wood and fertiliser, also fell 4.2 per cent year on year.

But German food producer prices rose 5.5 per cent and durable consumer goods prices rose 4.2 per cent. and the prices of many construction raw materials surged, such as a 23 per cent rise in cement prices.