Inflation is back in Germany, but this time companies are footing the bill
Lead — The commentary highlights a distinct shift in the inflation landscape in Germany, with companies absorbing cost pressures rather than passing them onto consumers. Per the full note , while inflation is indeed rising, it is doing so amidst weakened demand and significantly constrained pricing power. This scenario contrasts sharply with the inflationary environment of 2022, suggesting that companies will likely prioritize profit preservation over aggressive price increases. In this context, the broader economic implications for the Eurozone and associated FX pairs warrant close attention.
What the desk is arguing
The current inflation dynamics in Germany indicate that firms are increasingly absorbing cost burdens rather than transferring them to consumers. Per the full note , this trend is fueled by weakened demand and reduced pricing power, distinct from the rapid inflation seen in 2022.
With headline inflation at 2.9% as of August, which is only a degree above February's levels, it seems unlikely that Germany will revert to the double-digit inflation seen during the energy crisis just two years ago. This signals that while inflation may continue to trend upwards, the broader economic pressures exerted by consumer behavior and company profit strategies could lead to a more stable outlook than previously anticipated.
Where it sits in our coverage
Currently, our consensus target for the EUR/USD is 1.075, with a range from 1.04 to 1.12. Key targets from influential firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Our perspective aligns with jpmorgan, reflecting a slightly more optimistic outlook compared to bofa, which suggests a lower potential. The desk's positioning suggests that any significant price pressures from inflation may adjust within this range, indicating a balancing act between inflation expectations and economic realities.
How other firms see it
Firms like jpmorgan and hsbc share a similar optimistic stance regarding Eurozone inflation trends, indicating that they expect gradual economic resilience. In contrast, bofa holds a more cautious view, anticipating downward pressures from ongoing global economic uncertainties.
Worthy of attention is the interplay of the EUR/USD trajectory with ECB policy changes and broader economic indicators such as the labor market dynamics and energy prices, especially given current geopolitical tensions influencing these factors.
What the calendar says
No relevant calendar events are scheduled in the near term that might impact this outlook. Traders should focus instead on market data reflecting inflation trends and consumer behaviors, as these will set the tone for coming adjustments in monetary policy.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01German inflation is rising but companies are absorbing costs, indicating limited pricing power.
- 02Headline inflation at 2.9% shows some upward movement but less pressure than seen in 2022.
- 03The shift in cost absorption reveals a more balanced economic environment amidst geopolitical tensions.
- 04Market implications suggest a cautious approach to further inflation developments in the Eurozone.
Market implications
Focus on the EUR/USD as inflation dynamics in Germany evolve; current levels indicate a cautious trajectory amid diminishing pricing power among companies. Monitoring future inflation prints and economic indicators will be crucial as the Eurozone wrestles with supplying market demand against rising energy costs.
Risks to this view
A sudden escalation in global geopolitical tensions or a spike in energy prices could overhaul the current outlook, causing inflation to surge beyond expected levels. Should consumer confidence collapse, leading to significant demand drop, it may also catalyze a deterioration in company sales and profitability.
Articles Inflation is back in Germany, but this time companies are footing the bill Published 07:55 Germany Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Inflation is rising again, but this is not 2022. Weak demand and fading pricing power are forcing German companies to absorb more of the cost pressure themselves, turning profits into a buffer against a broader inflationary spiral Carsten Brzeski and Franziska Biehl As demand softens and pricing power wanes, German firms are absorbing a greater share of cost pressures The war in the Middle East and surging energy prices have pushed up headline inflation across the eurozone. In Germany, the impact was only temporary, as the government's two-month fuel tax rebate helped curb the rise in prices.
At 2.9% in August, inflation was roughly one percentage point higher than in February, but still nowhere near the double-digit rates reached during the 2022 energy crisis. And while inflation looks set to rise further over the coming months, potentially moving above 3% and remaining elevated until year-end, a return to 2022-style inflation still looks unlikely. Some knock-on effects from energy costs to other goods – though not visible yet – can be expected.
However, the conditions that allowed inflation to become a broad-based problem four years ago are not currently present. The labour market has softened, making strong wage increases less of a priority than job security. Pandemic savings are also gone.
In short, the financial ability and willingness to pay higher prices are much lower than after the pandemic. As a result, companies appear to face limits to their pricing power that simply did not exist in 2022. Pricing power stops before the consumer To assess industrial companies’ current pricing power, we have split domestic manufacturing turnover into a price contribution and an implied sales-volume contribution.
The logic is straightforward. If prices rise while volumes remain stable, companies are successfully passing on higher costs. If higher prices coincide with falling volumes, sales are being sacrificed in the process.
In 2022, almost all turnover growth came from higher prices. Once that contribution faded, weak sales volumes pulled turnover into contraction. More recently, prices have started to contribute positively to turnover growth again.
However, the aggregate picture masks substantial differences between sectors. Producer-price and implied sales-volume contributions to domestic turnover growth (Latest three-month average, May – July) Source: Eurostat; ING Economic & Financial Analysis "> Source: Eurostat; ING Economic & Financial Analysis Setting aside energy producers, whose markets are currently influenced by unusual factors and relatively inelastic demand, intermediate goods producers stand out. Here, prices are rising, while implied sales volumes remain broadly stable, pointing to relatively favourable pricing conditions.
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