Germany’s Producer Price Inflation Soars to Record High as Cost Pressures Slam Firms

A worker assembles Volkswagen cars at the company's Zwickau plant in Zwickau, Germany, on Jan. 27, 2022. (Jens Schlueter/Getty Images)

Soaring energy costs pushed Germany’s producer prices to a record high in May, suggesting households in Europe’s biggest economy should brace for even higher consumer price inflation as at least a portion of higher business costs tends to be passed along to end consumers.

Germany’s statistical agency said on June 20 that its gauge of producer prices vaulted 33.6 percent in annualized terms in May, the fastest pace since the start of data collection in 1949.

While a steep jump in energy prices drove the bulk of the rise in producer prices, the overall index excluding energy climbed 16.5 percent in May. That’s up from April and a sign that cost inflation was becoming more broad based, seeping into other categories, such as food, which climbed 19.2 percent in the year through May.

“Inflation pressures keep rising in Germany,” market analyst and author Holger Zschaepitz said in a Twitter post, adding that the soaring input costs suggest the writing is “on the wall” that consumer prices will likely climb further in Europe’s biggest economy.

Germany’s annual consumer price inflation in May jumped to 8.7 percent, while consumer inflation in the euro area as a whole climbed to a record high of 8.1 percent.

Energy costs were behind most of the surge in the producer price index, climbing 87.1 percent year-over-year in May. Light heating oil rose 96 percent, motor fuels were up 49.4 percent, and natural gas soared 148.1 percent.

Germany, which is highly dependent on Russia for its natural gas flows, is looking to cut consumption of natural gas as it seeks to reduce reliance on Moscow for supply.

German Economy Minister Robert Habeck said Sunday that the country must cut domestic consumption of natural gas and increase the burning of coal to help fill gas storage facilities for winter.

“The situation is serious,” Habeck said in a statement. “We are therefore continuing to strengthen precautions and taking additional measures to reduce gas consumption. This means that gas consumption must fall further, but more gas must be put into the storage facilities, otherwise things will really get tight in winter.”

The day after Habeck’s remarks, European natural gas prices jumped over 7 percent intraday, building on a sharp rally last week as Russia’s supply cuts drove concerns about shortages and rationing.

The uptick came on the heels of a 40-plus percent rally in European natgas prices last week as Russia reduced supplies to top buyers in Europe, blaming a technical problem related to Western sanctions. Leaders in Germany and Italy called Russia’s reductions a political move.

Monday’s producer price data adds to concerns that Germany’s economy is headed for a rough patch.

Inflation in Germany is likely to push higher and its economy is expected to grow more slowly this year, several think tanks predicted last week. Ifo Institute, a Munich-based research institution, cut its 2022 forecast for German growth to 2.5 percent, from an earlier forecast of 3.1 percent, while revising its inflation forecast to 6.8 percent, up from an earlier 5.1 percent.

“At the beginning of the year, high prices led to a loss of purchasing power among private households and in turn to a decline in goods consumption,” ifo economist Timo Wollmershaeuser said in a statement.

Germany’s IfW economic institute raised its outlook for German inflation in 2022 from an earlier forecast of 5.8 percent to 7.4 percent.