PPI inflation in Germany at the highest ever. Euro under pressure

Inflation in the euro area seems to be steadily rising, which may be influenced by rising costs of electricity and energy carriers. Today's Publication of Producer Prices in Germany suggests that in the euro zone the peak of inflation may still be ahead of us.

Germany is the largest economy in the euro area, so the published readings for this economy may have a large impact on the data for the entire EU.

PPI inflation in Germany is rising strongly

Today we learned that in July, producer prices were rising at our western neighbors at the fastest pace in history. PPI inflation in Germany on an annual basis it amounted to as much as 37,2 percent. A month earlier, the price increase was at the level of 32,7%, while the market consensus assumed inflation at the level of 32%.

Energy prices still appear to be the main driver of producer costs. The costs of this energy for enterprises increased by 105%. compared to July 2021. Were it not for this factor, producer prices could grow much slower, as only by 14,6 percent. - results from published data.

Entrepreneurs can translate such a significant increase in costs into their products, which, as a result, may also increase CPI consumer inflation. Hence, it cannot be ruled out that a possible peak in inflation in the euro area is still ahead of us. It may fall in the last quarter of this year or at the beginning of next year, assuming that energy prices start to stabilize or decline. Otherwise, the euro area economy may plunge into a deep crisis.

EUR / USD is close to parity again

Steam rate EUR / USD Today it fell 1,0084 (yesterday it was around 1,0200) and it came close to the 1,0000 parity again. Concerns about the euro area economy may be reflected in the exchange rate. It seems, however, that the reaction to negative data is getting weaker, as if the market has to some extent already discounted some bad news that may appear in the near future.

Upcoming activities European Central Bank may hold back the sell-off of the euro. According to the interest rate market, the ECB may decide this fall to raise interest rates twice, 50 bp each. The market assumes that the ECB will raise the main interest rate to 1,5 percent throughout the cycle. Contrary to the Fed, which may reduce the pace of rate hikes at the end of the year, the ECB may only start with a rapid increase in interest rates.