Former IMF chief economist Olivier Blanchard says the German inflation rate will fall below three percent by the end of 2023. The week has shown that he could be right.
First economists released inflation forecasts for 2023 this week that sound like a salvation to consumers. Former International Monetary Fund chief economist Olivier Blanchard told Manager Magazin that inflation in Germany is likely “a matter of two years”. At the end of 2023, the inflation rate will be “2.5 to 3 percent”. Several pieces of good news this week give hope that he might be right.
Several data published this week have fueled hopes that record inflation in Germany could ebb:
The price developments fuel hopes that inflation will at least not get much worse. As the difference between inflation (-10.4 percent in October) and producer prices (-35 percent) shows, manufacturers have not yet fully passed on past price increases to end customers in supermarkets and shops. If companies want to survive, they have to do so at some point. Producer prices therefore show where inflation is headed. If they increase by around half within a year, as they did in September, this promises many more rounds of inflation for the public. The decline in October gives reason to hope that these rounds of inflation could be milder or, if producer prices continue to fall, not at all.
However, the news does not promise an immediate end to inflation. According to a survey by the ifo Institute, companies intend to pass on the remaining two-thirds of their previous price increases to people more in the coming months. Even if the end of inflation now seems closer than it was a month ago, it has probably not come yet.
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The connecting element of all price declines are the reduced energy prices. They lower the transport and energy costs of companies and massively reduce the cost of manufacturing products.
Producer prices, which had already fallen in October, are good news for Germans because many of the relief measures intended to slow down inflation, which is mainly driven by expensive energy, will only come into effect in the coming months:
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All of these measures should curb inflation. The good news this week gives hope that it could weaken before then and that government aid will finally push it down to tolerable levels.
The Germans will get a first indication of the further development of inflation next Tuesday, November 29th. Then the Federal Statistical Office will present its estimate for the inflation rate in November. If it is lower than the October rate (10.4 percent), this bodes well.
In the long term, progress in the construction of the new LNG terminals, the conclusion of the associated gas supply contracts and the weather will determine how energy prices develop in Germany: A mild winter that is easy on gas storage and terminals that are completed quickly should slow down inflation significantly in the coming year .
Even if a lot of good inflation news is due to lower energy prices, the past week brought positive news that has little to do with the costs of gas, petrol and the like: the prices for shipping container transport have fallen significantly. Since many goods come to Germany by sea and their components are sometimes transported several times by ship during production, this development also lowers prices for end customers.
Inflation will probably accompany Germany for some time to come. After many months of bad news, the past week has provided several reasons for confidence. The Germans have every right to hope that the worst is behind them. No one can predict with certainty whether inflation will fall to 2.5 percent as a result. But the trend gives hope.
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