Mikkel Rosenvold
8 weeks ago

Analyst: Prices will remain low for German consumers

Ulrik Simmelholt of Steno Research predicts a period of lower core inflation for Germany, pointing towards beneficial conditions for consumers.
SATURN store on February 18,2015 in Wiesbaden,Germany.
Vytautas Kielaitis / Shutterstock.com

Ulrik Simmelholt from Steno Research provides an insightful analysis on the current economic landscape in Germany, indicating that German consumers can expect prices to remain low in the near future.

According to his examination, price expectations in the service sector, excluding real estate, have continued to decline, reaching levels last seen in 2018-19. This trend suggests lower core inflation readings in the latter half of the year.

Conversely, manufacturing price expectations have begun to rebound, aligning with the European Central Bank's (ECB) price stability mandate. Factors such as decreased input costs, the global reflation narrative, and anticipated ECB rate cuts have contributed to this shift.

The juxtaposition of service and manufacturing price expectations raises questions about their respective impacts on inflation in the upcoming seasons.

Additionally, order-to-inventory ratios in Germany, particularly in the chemical sector, have shown improvement due to falling input prices and stable energy prices. However, the overall outlook remains tepid, with sectors like the automotive industry and basic metals continuing to face challenges despite some signs of reflation.

High-frequency indicators present a mixed picture, with electricity consumption declining on a year-to-year basis, while truck toll mileage shows slight improvement.

This divergence casts doubt on the ongoing cyclical repricing of European equities and suggests potential adjustments in investment strategies, including considering short positions in German equities.

Finally, despite some sectors like chemicals showing signs of recovery, the broader IFO report does not support a strong reflation narrative for Germany. Simmelholt interprets these indicators as signs of impending sub-target inflation in the Eurozone, reinforcing the outlook of sustained low prices for German consumers.

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