This week is central bank week as a veritable carousel of meetings takes place. The US Federal Reserve has already hinted at a further slowing of its QE buying whilst the Bank of England looks set to add to its unreliability problem. But this morning’s news applies both focus and pressure onto the ECB in Europe. Here is the German statistics office.
WIESBADEN –In November 2021 the selling prices in wholesale trade rose by 16.6% compared with November 2020. There has not been a higher annual rate of change since the beginning of the calculation of the wholesale price indices in 1962. In October 2021 and in September 2021 the annual rates of change had been +15.2% and +13.2%, respectively.
There is the shock effect of the annual number followed by noting that it is a record for a series which is nearing 50 years. That provides some food for thought in that it covers the 1970s inflation burst that we keep being promised will not be repeated. If we switch to the monthly figures we see that the growth opened the year at 2.1% and the lowest number since then has been 0.5%. It looked like there might be a fading in August when the 0.5% print occured but since then we have gone 0.8%,1.6% and now 1.3%. So yet again reality has crumbled the “transitory” claims of the central bankers. These types of series or measures are by their nature somewhat erratic but 2021 has produced and consistent drumbeat.
In terms of the detail we only get some basic information.
The high rates of change for wholesale prices in annual comparison derive from increased prices for raw materials and intermediate products. The largest impact on the year-on-year price rate in wholesale trade had the increased prices for mineral oil products (+62.4%).
Power Prices
Last week saw some surges in power prices for next year and here is a reminder from Bloomberg.
Power prices for delivery next year surged over 15% in Germany and almost 14% in France by Wednesday’s market close as freezing weather has forced European utilities to burn more gas, coal and even oil to keep the lights on. High prices this month are spilling into futures contracts for the following years, a sign that the crunch could last longer than many expected.
In terms of numbers there was this.
German power for next year, a European benchmark, reached 192 euros ($218) a megawatt-hour, while the equivalent French contract surged to as high as 222.75 euros before closing at 222.50 euros.
This morning it is a case of higher and higher baby it’s a living thing as ELO would put it.
French Week-ahead Baseload Power Up 64.9% At 470 Eur/mwh German Week-ahead Power Up 20.4% At 295 Euros. ( @PriapusIQ )
There must be some wind in Germany but not enough. The new push looks to have been driven by yet more debate over Nordstream-2.
GERMAN FOREIGN MINISTER SAYS NORD STREAM 2 PIPELINE CANNOT BE CERTIFIED UNDER CURRENT CONDITIONS AS IT DOES NOT FULFILL EUROPEAN ENERGY RULES – PUBLIC BROADCASTER ZDF @DeltaOne)
The whole mess is feeding the inflation issue as we see that energy costs will continue to be a player in pushing it higher for both industry and the consumer. I also note that we have yet to see any particularly cold still days where the wind farms sit idle.
Also at the moment news like this makes the markets edgy.
Belarus President Again Warns Minsk Could Suspend Gas Transit To Europe In Response To New Western Sanctions – Tass ( @PriapusIQ )
Agriculture
There is another issue here for Germany.
WIESBADEN – Producer prices of agricultural products were 16.3% higher in October 2021 than in October 2020. The prices were up by 2.8% on September 2021.
This time we get some more detail.
The Federal Statistical Office (Destatis) also reports that especially prices of plant products rose on the same month of the preceding year. In October 2021, they were by 24.4% higher than in October 2020. One of the reasons is that grain prices have increased for some time already. These were 36.9% higher in October 2021 than a year earlier, and even slightly higher than in September 2021. In that month, the change had been +33.3%. The main reason for grain price increases is the high demand from both German and foreign flour mills.
Looking ahead over the timescale relevant to central bankers there is another issue on the horizon which is the impact of fertiliser prices on food prices and hence inflation. Regular readers will recall we have noted several instances of fertiliser plants closing because they are uneconomic due to the rise in energy costs. The last one was in Romania I think. The issue is something that is ricocheting around the world.
But analysts say fertiliser supply tightness will worsen early next year. European, North American and North Asian farmers all need to step up purchases ahead of spring planting, while key producers China, Russia and Egypt have curbed exports to ensure domestic supplies. ( Reuters )
Reuters looked at Germany in particular.
In Germany, farmers hit by price increases are likely to reduce fertiliser use, which could lower harvest volumes “depending on the scale that this takes place,” said Bernhard Kruesken, secretary-general of German farming association DBV.
So food price inflation looks here to stay.
Comment
We can now switch to what the response of the ECB is likely to be? The starting gun on the debate was fired last week by Executive Board member Isabel Schnabel.
During economic upswings, however, central banks must recognise that the actions they take to deliver on their price stability mandate have the potential to contribute to a build-up of risks to financial stability.
So we prioritise the banks over the people yet again and rather than adjusting the issue we see that “Transitory” will eventually be sort of true if we hang on for long enough.
The first relates to the horizon over which monetary policy aims to bring inflation back to its target.
I am sure most of you have figured where that is going.
Responding to such supply-side shocks by raising policy rates prematurely would risk choking the recovery and, given the long lags in transmission, exert downward pressure on inflation at a time when the shocks are likely to have already faded.
There is an obvious flaw here in that she is presenting the reaction function in reverse and hoping to get away with it. In fact she would be too late for current inflation rather than premature if she raised interest-rates now. As to ECB forecasts well at this time last year they told us inflation would average 1% this year, how is that going?
If we switch to the pre meeting leaks there is this from Reuters.
ECB monthly bond purchases of 20 billion euros under the six-year old APP are expected to double from April to stabilise long-term inflation at 2% and replace much of the lost PEPP stimulus.
Just as a reminder inflation is at 4.9% which is why they are referring to the long-term after all at a time like this almost anything might happen in the long-term! It is also revealing that there may be debate over whether to end the main stimulus effort with inflation at these levels.
The ECB is likely to confirm that the 1.85 trillion euro ($2.09 trillion) Pandemic Emergency Purchase Programme (PEPP), launched in March 2020 at the height of COVID-19-induced market turmoil, will end next March.
I suppose it is kind of them to confirm my theme that QE is now for infinity as even with inflation at these levels it looks set to carry on.
The reality is that the ECB intends to do nothing about inflation.
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