Record high producer prices: how big is the hole in the wallet?

Record high producer prices
How big is the hole in the wallet?

By Roland Lindenblatt

Supply bottlenecks for wood and steel are whipping up the prices for commercial intermediate products to heights that we have not seen for almost 50 years. The question is, how much do consumers notice this at the checkout?

In the weeks leading up to the election, the Germans’ fear of inflation is particularly driven by Friedrich Merz. “Inflation is the little man’s pickpocket,” said the Union politician in an interview with the “Handelsblatt” in mid-September. For next year he even forecast price increases of almost five percent. According to Merz, this would of course be due to “Olaf Scholz”.

In fact, inflation has risen sharply in the past few months. It is currently just under four percent. However, this is not due to Olaf Scholz, but above all to the end of the corona pandemic. A resurgent demand, especially for energy, and the reversal of the VAT cut from last year have contributed to this. One-time effects that will no longer occur in the coming year.

Economists therefore calm down. “At the Ifo we expect that we will have higher inflation rates for a few months now, but that this will then normalize again,” said the President of the Ifo Institute, Clemens Fuest, at the end of August in the interview series Frühstart from RTL and n-tv. Some economists even fear that inflation could soon be below the ECB’s two percent target again, which would be just as undesirable as high inflation.

Wages and supply constraints can drive prices up

There is a certain risk of higher inflation if the labor market becomes tight, companies have to pay higher salaries and raise prices, or if companies pass on their ever increasing material costs to customers.

The latter in particular could happen. Because many raw materials have been getting more and more expensive for months. Prices for wood, steel and other metals have doubled compared to the previous year because companies are suffering from supply bottlenecks. As a result, producer prices for companies were twelve percent higher in August than in August 2020 – the highest increase since December 1974 since December 1974. However, the question arises as to how much producer prices influence the prices of what Germans regularly buy?

First of all, that depends on how long producer prices remain so high. Since the production of many goods takes a certain amount of time, price increases are often passed on with a delay and not all companies at the same time. Pricing contracts also prevent companies from passing on their prices directly. It would normally take about a year for changes in input prices to affect inflation, it says in a research report by the ECB.

Delivery bottlenecks likely until 2022

The supply bottlenecks are currently mainly caused by the high demand worldwide and the unsteady shipping traffic. In a survey by the German Chamber of Commerce and Industry, 80 percent of companies expect that there will be no more easing this year. Retail experts assume that the problems will resolve early next year. So there is a certain risk that the higher producer prices will be passed on. And in fact, some products that are suffering from delivery bottlenecks for preliminary products are already more expensive than in 2020. Vehicles or furniture and lights cost 5.5 or 4 percent more than last year.

There is, however, a second factor that ensures that consumer prices do not rise in step with producer prices. Two thirds of the inflation index in Europe and the US were based on prices for services, not for the manufacturing sector, said ECB chief economist Philip Lane in an interview with the Financial Times in May. However, the prices for services only rise when wages rise. This is still a long way off in Germany.

Many price drivers will disappear in 2022

So there is a possibility that prices for consumers will rise slightly due to the supply shortages. But high inflation is not to be expected, because the effects that have currently driven inflation to close to four percent will disappear in the coming year.

All you have to do is remember that inflation compares the current prices with the prices of the same month last year. The previous year, 2020, was a special year for price developments. Factories stopped, people at home, and planes on the ground. Energy prices in particular fell due to the low demand. Then the federal government also lowered the value added tax from 19 to 16 percent. As a result, inflation was negative for several months at the end of 2020.

Since most of the factories have been running at full speed again, people stroll through shopping malls and go on vacation, prices have risen. The VAT increase was also withdrawn. If you compare this normality with normal prices with the unusually low prices of the previous year, it comes as no surprise that inflation is high.

If 2022 does not have another pandemic, inflation should fall again. Even if the supply bottlenecks and higher producer prices have a slight impact on consumer prices.

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