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German wholesale inflation continues to drop on energy price falls

A small German national flag waves in front of the central train station in Frankfurt, Germany, on a rainy Wednesday, June 19, 2024. (AP Photo/Michael Probst)
A small German national flag waves in front of the central train station in Frankfurt, Germany, on a rainy Wednesday, June 19, 2024. (AP Photo/Michael Probst) Copyright Michael Probst/Copyright 2024 The AP. All rights reserved
Copyright Michael Probst/Copyright 2024 The AP. All rights reserved
By Indrabati Lahiri
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Falling natural gas and electricity prices were the main contributors to May’s figure, as well as the declining cost of intermediate goods.

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The German year-on-year producer price index (PPI) report for May was released on Thursday morning, coming in at -2.2%, up from April’s -3.3%, according to the Federal Statistical Office. However, this was still slightly higher than analyst expectations of -2%. 

The producer price index looks at inflation at a wholesale level, by comparing how the prices that domestic manufacturers receive for their products changes over time. 

May’s figure marked the 11th month in a row that producer prices had declined, however, it was still the lowest number during this period. This was mainly due to energy prices falling, at -6.4%, led by natural gas prices sliding -16.3%, as well as electricity prices dropping -11.3%. 

Furthermore, the cost of intermediate goods also decreased, with basic chemicals’ costs falling -4.9% and paper, paperboard and paper products’ costs dropping -6.1%. The cost of wood products fell as well, coming in at -4.5%, with metals’ costs declining -4.1%. 

However, capital goods prices increased 2.4%, driven by trailers, motor vehicles, and semi-trailers’ costs rising 1.6%. Machinery costs also jumped 2.6%. Similarly, non-durable consumer goods’ costs also inched up 0.4%, mainly due to butter costs surging 21.4% and confectionery costs leaping 21.7%. Durable goods’ costs edged up 0.7%. 

The month-on-month producer price index came in at 0%, down from April’s 0.2%, and below market estimates of 0.3% as well. 

German economy expected to remain sluggish this year

The German economy has taken quite a beating in the last few months, with the lingering effects of the pandemic and the ongoing Russia-Ukraine war still being widely felt. This has been combined with higher interest rates, soaring cost of living and pervasive uncertainty about economic and business prospects. 

Although the producer price index for May decreased considerably, German inflation still inched up last month, coming in at 2.4%, above both March and April’s 2.2%. This has sparked renewed worries about whether Europe’s second-largest economy could potentially be seeing a setback. 

In its economic forecast for Germany, the European Commission said, “Following a recession in 2023, economic activity in Germany is expected to stagnate in 2024. Domestic demand is set to pick up slowly in 2024 and 2025, as real wage growth resumes. However, investment is projected to remain well below pre-pandemic levels, constrained by continued high financing costs. 

“Exports are forecast to remain sluggish in 2024 and slowly recover in 2025. Driven by domestic demand, gross domestic product (GDP) growth is expected to increase moderately in 2025. Fiscal consolidation continues with the government deficit and the debt-to-GDP ratio gradually decreasing, benefiting from the phase-out of energy support measures.” 

German GDP growth is expected to be 0.1% in  2024 and 1% next year, with unemployment remaining steady at 3.1% both in 2024 and 2025. 

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