Piece by Nkosilathi Dube, Trive Financial Market Analyst

Germany has found itself at the cusp of disinflation, to the delight of the European Central Bank (ECB), as wholesale prices have taken a downturn year-on-year since peaking in the second quarter of 2022. May 2023 saw the most significant drop in wholesale prices in nearly three years, with a 2.6% year-over-year decline. The ECB’s steepest hiking cycle in its history, in response to steep inflation in 2022, could be nearing its finale as inflation slows. Should Germans view the decline in wholesale prices as the dawn of disinflation?

The Wholesale Prices Index tracks changes in prices of goods sold by German whole merchants. Agreements made with processors, resellers, or other significant buyers of large quantities of commodities are accounted for in the index. This can apply to both German-produced goods and goods imported into the nation. The figure excludes sales made directly by producers to retailers or end users.

According to the federal statistics agency, the coronavirus pandemic caused economic irregularities, and May’s year-over-year decline was the largest since that point in July 2020. The decline in wholesale prices was primarily due to the easing of prices of raw materials. The price decline of 22.7% for products containing mineral oil was the primary factor in the year-over-year decrease. The yearly slowdown in May 2023 was further impacted by price declines in scrap and residual materials (-31,3%), cereals, raw tobacco, seeds, and feedstuff (-27,9%), ores, metals, and semi-finished metal goods (-22,1%), as well as chemical products (-9.4%).

Among the main culprits that drove up wholesale prices were rising food, energy, and commodity costs, which further contributed to the increase in Germany’s overall inflation.

The start of the Russia-Ukraine conflict was a nightmare for Europe because it pitted two of the world’s critical food and energy producers against one another in 2022.

Crude oil and natural gas prices rose due to supply-side concerns, with the impact being most pronounced in wider Europe, which relied significantly on Russian energy. Germany used to buy more than a third of its oil and about half of its gas from Russia.

Christian Lindner, Germany’s finance minister, asserts that the country no longer directly purchases energy from Russia. Heating oil and natural gas prices soared dramatically at the height of the energy crisis, by 87% and 64.8%, respectively. The cost of electricity increased by 20.1%, while the price of petrol and diesel at the pump increased by 26.8%. This spread to numerous economic sectors, including the food and logistics industries, and caused the Wholesale Prices and Consumer Price Index to rise sharply as a result.

Natural gas and crude oil prices have since peaked (NYMEX: NG and CL, respectively). As seen above, while crude oil prices (NYMEX: CL) have declined from a peak of $114.67 per barrel in May 2022, natural gas prices (NYMEX: NG) have returned to pre-pandemic levels after reaching record highs of $9.127MMBtu. The decline in commodity prices led to the point of transition, where Wholesale Prices began declining year-on-year.

Zusammenfassung

With the majority of the inflationary-inducing factors now abating, Germans could take this as a good sign that prices might be on the decline. Energy prices have returned to what they were before the inflation scare. Germany may experience disinflation due to its decreased reliance on Russian energy. The decline in commodity prices will likely have a significant role in maintaining wholesale prices at lower levels compared to the peak of 2022.

Source: Federal Statistical Office, NYMEX, Reuters, TradingView


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