Germany faces an inflation problem

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by Shaun Richards

It was only yesterday that I noted that the head of the German Bundesbank had suggested consumer inflation might reach 5% later this year. So this morning’s official release caught my eye.

WIESBADEN – As reported by the Federal Statistical Office (Destatis), the index of import prices increased by 12.9% in June 2021 compared with the corresponding month of the preceding year. This has been the highest year-on-year-change since October 1981 (+13.6%). In May 2021 and in April 2021 the annual rates of change were +11.8% and +10.3%, respectively.

As ever there is an attempt to say it doesn’t really matter as we are quickly given a version of a core measure.

In June 2021 energy imports were 88.5% more expensive than in June 2020. This high rate of annual change derives from the very low prices in June 2020. The largest influence on the year-on-year rate of energy price increase in June 2021 had natural gas with a plus of 150.0% and crude oil with a plus of 81.8%.

So we are in central banking territory as we look to remove this affect but the issue still hangs around in spite of that.

The index of import prices, excluding crude oil and mineral oil products, increased by 9.8% in June 2021 compared with June 2020 and in comparison with May 2021 it rose by 1.3%.

Energy in Germany has been in the news due to the deal on the Nordstream-2 project which means the price of gas is even more likely to be in focus in the future.

Going through the categories there would be scope for them to give Iron Ore the same treatment as a year ago the index was 219.9 and in June it was 318.6 and rose by 9.4% on a monthly basis. Whilst checking that I noted that coffee and tea were unchanged on a monthly and annual basis. I point that out because the drought in Brazil has ramped the price of coffee futures recently.

If we look at the pattern for monthly rises we see that they have turned since January and have been between 1.4% and 1.8% since.

From May 2021 to June 2021 the index rose by 1.6%.


There was not much relief from the export data series which showed this.

The index of export prices increased by 5.0% in June 2021 compared with the corresponding month of the preceding year. This has been the highest year-on-year-change since April 1982 (+5.6%). In May 2021 and in April 2021 the annual rates of change were +4.2% and +3.3%, respectively. From May 2021 to June 2021 the index rose by 0.8%.

So Germany is passing some of it on.

Energy Prices

ING have looked at this and note this about power demand in June.

Despite somewhat disappointing numbers in April and May for industrial production, Germany’s electricity demand bounced back remarkably as well, with a 3% increase.

They think the pricing situation will ease next year based to some extent on Nordstream-2 and its impact on gas supply but do point out this.

Coal is still a major energy source in some European power systems, with Poland and Germany being a case in point.

Coal prices have not been left behind by the surge in energy prices. European coal prices have rallied a little more than 74% in 1H21 and have traded above $130/t recently. Having seen global coal demand falling by an estimated 4% in 2020, the IEA is forecasting that global coal demand will grow by 4.5% in 2021, taking demand back to pre-Covid-19 levels.

As to lower prices here they seem to be hedging their bets a bit.

In Europe, a tight gas market has proved bullish for coal. However, there are also supply dynamics which have tightened the coal market such as disruptions in Colombia, a key coal exporter to Europe. China has played a key role in the strength of the market, with strong restocking demand for the summer helping to tighten the market. Nevertheless, one cannot rule out changes to government policy which could have a large impact on the seaborne market.

I have to confess I did not know about the coal industry in Colombia.

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Producer Prices

Back on the 20th of this month I pointed out that these were flashing a warning sign.

The real issue here is the monthly increase and they turned last December and since then have been in a range between 0.7% and 1.5%. suggesting a Yazz type situation.

That was then reinforced by the Markit PMI business survey.

Strong inflationary pressures remained a prominent
feature of the survey data in July, with charges for
goods and services continuing to be raised in line
with higher costs. The rate of input price inflation
ticked down for the first time in eight months from a
record high in June, though it was still quicker than at
any other time in the series history. The result was
driven by the service sector and masked an
acceleration in manufacturing purchase price
inflation to a new all-time high.

These pressures were being passed on.

It was a similar picture for output prices, with a
slightly slower (but still strong) increase in services
charges contrasting with a sharp and accelerated
rise in factory gates prices. The combined rate of
inflation was the second-fastest seen since this
series began in September 2002.

House Prices

Things here are on rather a tear and we are also told the impact is widespread.

WIESBADEN – The prices of residential property (house price index) in Germany in the first quarter of 2021 rose an average 9.4% on the first quarter of 2020. The Federal Statistical Office (Destatis) also reports that this price development was observed both in towns and in rural regions. Increases were particularly marked for prices of dwellings in cities with 100,000 or more inhabitants (+11.3%) and in the seven largest metropolises (Berlin, Hamburg, Munich, Cologne, Frankfurt, Stuttgart and Düsseldorf) (+11.1%) and for prices of single-family and two-family houses in thinly populated rural districts (+11.3%).

As the Fresh Prince put it.

Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Boom! shake-shake-shake the room
Tic-tic-tic-tic boom!


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We can see that the heat is on in the German inflation pipeline. That is yet to feed through in scale to the consumer inflation measure at 2.1% although it did rise 0.4% in the month to June. They must be so grateful they have kept house prices and in fact any measure of owner-occupied housing out of the measurements. has looked at this and added in the issue of interest-rates.

It is not surprising that the REAL German Pfandbriefe 10-year rate is negative, since the NOMINAL rate is also negative. Especially since the NOMINAL German sovereign yield is negative.

A Pfandbriefe is a type of covered bond. A covered bond is a debt security that is common in Europe. It issued by a bank or mortgage institution and collateralized against a pool of assets that, in case of default of the issuer, can cover claims at any point of time.

On the short end of maturity, the REAL 1-2 year Pfandbriefe rate is -2.55.

Care is needed because you are comparing a yield looking ahead a year or 2 with inflation over the past year but there is a point to it as an indicator.

Now let me return to the Bundesbank which on past history would be raising interest-rates right now. As the ECB has no such intention we see quite a shift in policy.


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