Nothing is currently preoccupying economists as much as high inflation rates. In the meantime, most countries and central banks have made good progress in combating it – but the successes are not the same everywhere, and in some cases even very different. This was shown again this week when countries like Germany, the USA, France and Spain published their latest inflation numbers.
Accordingly, inflation seems to be firming up in Germany in particular, while tending to fall more sharply in the other countries. According to the Federal Statistical Office, between May and June consumer prices even rose from 6.1 to 6.4 percent year-on-year – and inflation picked up speed for the first time in three months. Meanwhile, inflation in the US has weakened again and noticeably. Consumer prices increased by 3.0 percent compared to the same month last year, as the US Department of Labor announced in Washington on Wednesday. In the previous month, the rate was 4.0 percent. The development was similar in France and Spain.
The development of inflation rates is particularly important for the central banks, which base their key interest rate policy on it. Should inflation in Germany actually solidify, this could put pressure on the European Central Bank to tighten interest rates further. In the US it would be the opposite for the Fed. The markets welcome falling interest rates because they create more favorable financing conditions for companies. This is one of the reasons why prices on Wall Street have risen according to the latest data this week.
However, looking at inflation and fighting it shouldn’t be quite that simple. Because even though price increases in Germany have picked up again recently, a lot depends on the interpretation of the data. In Germany, the USA, but also in France and Spain, base effects in particular were responsible for the development. And if you take a closer look, the differences are not that big, or: the conclusions are similar.
In Germany, for example, a year ago there were temporary measures such as the tank discount or the 9-euro ticket. At the time, this resulted in a reduction in the inflation rate of around two percentage points. This effect is now gone. Economists therefore see the current increase primarily as a temporary phenomenon.
Despite the introduction of the Deutschlandticket, train tickets for local transport cost 65.2 percent more in June than a year earlier. At 49 euros, the Deutschlandticket is significantly more expensive than the 9-euro ticket. According to statistician data, the temporary reduction in mineral oil tax also slightly reduced fuel prices in the months of May to the end of August 2022. However, it cannot be precisely quantified whether the decline is solely due to the tank discount.
Price drivers in June were again food, which rose by 13.7 percent compared to the same month last year. After all, prices rose less than in May (14.9 percent). Consumers had to pay significantly more for dairy products (22.3 percent) and for sugar, jam, honey and other confectionery (19.4 percent) in June. Vegetables (18.8 percent) and bread and cereal products (18.3 percent) also became noticeably more expensive within a year.
Energy prices, which had risen sharply a year earlier due to Russia’s war of aggression against Ukraine, grew at a below-average rate of 3.0 percent overall. Light heating oil became cheaper by 36.5 percent within a year. On the other hand, natural gas (20.8 percent), electricity (10.5 percent) and district heating (9.3 percent) were more expensive. The federal government is trying to find relief: the price brakes for natural gas, electricity and district heating, which apply retrospectively to January 1, are intended to dampen the increase.
The development of the core rate, which excludes the volatile prices for energy and food, shows that the danger of inflation has not yet been averted in the USA either. While that rate fell to 4.8 percent from 5.3 percent, it remains high.
Economists had expected this decline. The core rate is considered a good indicator of fundamental inflation trends and is therefore analyzed in detail by the US Federal Reserve. This is aiming for an inflation rate of 2.0 percent and sees no need to change its strategy in view of the current core rate. maintained the interest margin at 5.00 to 5.25 percent in June. However, this pause should not be interpreted as a signal that the interest rate peak has already been reached, said Fed New York Branch Chairman John Williams. It could go further up.
“There is still far too much pressure in the cauldron when it comes to inflation. A base effect in energy prices did allow some steam to escape. However, an opposite effect will increase inflationary pressure again in July. However, the trend for the inflation rate is further downwards, only the core rate remains quite sluggish. The Fed will therefore tighten the key interest rate screw one more turn at the end of the month,” explained analyst Bastian Hepperle from the Hauck Aufhäuser Lampe bank.
Meanwhile, Spain even seems to have reached its goal. Compared to the previous year, prices there rose by only 1.9 percent in June. This even undercut the ECB target of 2.0 percent. Core inflation excluding energy and food also fell to 5.9 percent from 6.1 percent.
Here, too, the reasons lie primarily in the base effects. A gas price cap of 50 euros per hour has been in effect in Spain since June 2022, should the gas be converted into electricity. But because the spot market prices are included in the statistics, the effect of the cap on the inflation rate was small.
The strong decline was even expected this month because the price increase in Spain in June 2022 was particularly high at 10.2 percent. The inflation rate was only higher in July 2022 at 10.8 percent, which also suggests that the rate will be particularly low again in the coming month.
The fact that the price pressure is generally decreasing is mainly due to falling energy prices. These peaked last summer after Russia stopped supplying energy to numerous European countries. After the initial shock and numerous political countermeasures, the markets calmed down again over the course of the year. Gas prices are now back at the October 2021 level.
This is where Spain differs from many other European countries. Because instead of decoupling itself in terms of energy policy, Spain increased gas imports from Russia by 63 percent last year. From February 2022 to January 2023, Russia supplied 58.1 terawatt hours of natural gas to the country, according to a report by Spanish transmission system operator Enagas. In the same period last year it was 35.7 terawatt hours. Between January and April 2023 alone, 118 percent more gas was imported from Russia to Spain than in the previous year.
Just like the USA, the country has a broad range of energy supplies. For one thing, it can cover its energy needs from renewable sources on most summer days. On the other hand, Spain even has a pipeline to Algeria and the largest gas storage facilities in Europe. There is a simple reason why the country still imports gas from Russia. “Alternatives exist to replace Russian gas, but they are much more expensive,” Eduardo Irastorza from EAE Business School told Spanish TV channel Antena 3.
So it’s no wonder that politicians are now increasing the pressure on corporations to pass on the lower energy prices to customers. As food prices have overtaken energy prices as the main driver of inflation across Europe, these manufacturers are under particular pressure. Companies such as Nestlé, Unilever and Pepsico reported good quarterly results, partly because they were able to pass higher costs on to consumers.
In France, Economics Minister Bruno Le Maire has therefore threatened food manufacturers with mandatory levies if they do not lower their prices. “You can keep part of the margin for yourself (…) but there is part of the margin that you have to give to consumers.” The minister threatened: “If you don’t do it, we’ll collect it through taxes,” he said in the direction of the entrepreneurs. For some products where wholesale prices have fallen, retail prices should also fall — by two, three, five or even 10 percent, Le Maire said.
A similar discussion recently flared up in Italy. Consumer advocates there called for a “pasta boycott” because manufacturers even increased their prices despite falling energy costs. Although general inflation has also eased here in recent months, the price of a kilogram of pasta rose by 14 percent in May compared to the previous year. It was 15.7 percent in April and 17.5 percent in March, according to official statistics. In the meantime, the national competition authority there is investigating whether illegal price fixing has taken place. Outcome: uncertain.
This article first appeared here at Capital.
