Germany: Profit squeeze tempers price risks – ING

ING economists Carsten Brzeski and Franziska Biehl argue that while German inflation is set to rise above 3% and stay elevated into year-end, a repeat of 2022’s double-digit surge is unlikely. Weak demand, a softer labour market and exhausted pandemic savings are curbing pricing power, forcing companies to absorb cost pressures through lower profits rather than passing them on to consumers.

German firms absorb rising cost pressures

"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."

"While pricing power may still exist upstream in the production chain, it increasingly disappears before reaching the consumer. This yields two important conclusions: (i) the pass-through of higher energy prices to final consumption, and hence inflation, continues to look unlikely; and (ii) if the consumer is not paying the bill, someone else will have to."

"Even if the inflation backdrop becomes more challenging in the months ahead, the dynamics look fundamentally different from those seen during the last energy crisis. Back in 2022, profits were widely viewed as part of the inflation problem, giving rise to terms such as "greedflation" and "shrinkflation". This time, it seems as if profits or better profit-squeezing, will dampen, not enhance, inflationary 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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)