German producer price index slides for fourth consecutive month

Germany’s producer price index for October slid 11% year-on-year, as expected by analysts, further extending September 14.7% decline. 

This was the fourth consecutive month of weakness, mainly caused by energy and metal prices. The index mainly takes into account mining, energy, manufacturing and water industry products.

The reduction was largely attributed to inflated commodity prices last October, due to the effects of Russia’s war against Ukraine. Since then, prices have been coming down, as the market readjusts itself, along with the help of energy price caps across Europe.

Inflation was another major factor last year, causing upward pressure on prices. However, the aggressive monetary policy tightening cycle adopted by most central banks, including the European Central Bank (ECB), helped bring prices down significantly.

October 2023 saw energy prices plunge 27.9%, with electricity costs dipping 36.2%. Petroleum products inched down 13.2%, while fuel prices were also 12.8% cheaper.

Metal prices dropped 11.7% year-on-year, with ferroalloys, pig iron and steel seeing a slide of 18.9%. Intermediate goods also took a hit, pressurised further by wood prices, which fell 17.9%. Fertiliser and nitrogen prices also tumbled 45.5%, with livestock feed going down 22.3% as well.

However, non-durable good prices increased quite a bit, with preserved vegetables and fruit prices going up 16%. Pork also climbed up 10.4%, with processed potatoes surging 29.4% as well. Durable goods followed a similar pattern, with furniture inching up 4.8% and machinery up 5.4%.

How does this affect the rest of Europe?

Germany’s price producer index is a vital indicator of inflation in Europe’s biggest economy. Thus, the PPI falling for the fourth straight month could be crucial information that the ECB takes into account for its next monetary policy decision.

Currently, the ECB interest rate is set at 4%, as the central bank has halted its monetary tightening cycle for now.

This is especially true as Germany is also currently struggling with a weakening demand across the board, especially when it comes to energy. The International Energy Association estimates that the country may see a fall in oil demand of about 90,000 barrels a day this year, mostly due to naphtha and diesel demand cooling.

German housebuilding has also been considerably subdued, much below chancellor Olaf Scholz’s target of 400,000 new houses a year. Although the reduction in key intermediate materials such as wood, metals and energy may help somewhat, ultimately, lacklustre demand is still expected to weigh the industry down.

However, the European Union is more optimistic about Germany’s growth, estimating a gross domestic product growth of 0.8% in 2024, and 1.25% in 2025.