Even if US inflation has fallen for three months in a row, investors should not assume that the end of German price increases is near. Because inflation here has other causes, it should remain high in the short term, but could be less threatening than in the US in the long term.
US inflation fell for the third straight month in October, and by more than expected. After the inflation rate fell to 7.5 percent (September: 8.2 percent), experts declared that the turnaround had been achieved.
But the course fireworks that this news also triggered on the Frankfurt Stock Exchange does not mean that German investors should declare inflation in Germany over: On Friday, the Federal Statistical Office announced that inflation in October was 10.4 percent reached its highest level in 70 years.
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Inflation is rising in Germany while falling in the US for three reasons investors should consider when making decisions and forecasts.
The US Federal Reserve started raising interest rates earlier and more vigorously than the ECB. At 3.75 to 4.0 percent, the US base rate is well above the European rate of 2.0 percent. This is a lesser reason why inflation in the US is already declining while it continues to rise in Germany. For the ECB, however, the decline in inflation in the USA does not give any reason to refrain from further increases in key interest rates.
The European Central Bank is more likely to try to slow down the currency devaluation by further interest rate increases here as well. The next increase is expected in December.
According to expert opinion, the European stock markets have already priced in interest rate hikes of three to four percent. Until there are indications of further increases, further rate hikes need not shock investors.
In Germany, inflation is rising for different reasons than in the US. While in the United States it is mainly more expensive services and non-energy industrial goods that are driving prices, while energy costs only contribute around a fifth to inflation, in Germany almost half of the price increases are due to rising energy prices, emphasizes Georg Thiel, President of the Federal Statistical Office.
At best, the ECB is curbing energy prices slightly by raising interest rates. If the ECB raises its key interest rate to a similar level as the US central bank is currently doing, it will not necessarily put an end to German inflation.
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Investors should therefore keep energy costs in mind when making inflation forecasts for Europe. Most recently, producer prices had risen significantly due to expensive gas and petrol, which should keep inflation high in the near future. The procurement of substitute energy and government relief such as the gas price brake could slow down this effect when it comes into force next year. A lot depends on her.
Although the interest rate hikes by the ECB are not doing much to curb the current inflation, Michael Hüther, Director of the German Economic Institute, praised the decisions on Deutschlandfunk: They showed that the ECB is not indifferent to inflation.
Core inflation suggests that inflation in the US could remain higher than in Germany over the long term. US inflation in services and industrial goods is rising mainly because the government increased people’s incomes with huge relief packages during the corona pandemic: more demand drives up prices.
In Germany, supply has collapsed due to interrupted supply chains and expensive energy. That also drives up the price. However, if the supply chains function again and Germany offers cheaper energy, inflation here could fall faster and remain lower in the long term than in the USA.
Core inflation adjusted for short-term fluctuations and external influences is currently around six percent in the USA, around one and a half times as high as in Germany, at around four percent. The readings show that despite lower overall readings, US inflation is likely to have a longer-term impact.
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The disadvantage from a European point of view: interest rate increases slow down demand-driven inflation much more than supply-driven inflation. The ECB is thus fighting with a blunter sword than its American counterpart – one reason why it has long shied away from raising interest rates.
