The German Producer Price Index rose +0.5% in August month-over-month and improved on an annual basis to -6.9%, signaling an inflection point in PPI. We believe this inflection is another indication of rising inflation in Q4 for Europe’s largest economy, and expect to see an incremental rise in CPI sequentially in the intermediate term.
It is worth noting that energy costs are a main component of PPI (contributing to some two-thirds in change of the index, according to the Federal Statistics Office) and that the plummet of energy prices off last summer’s highs will define annual compares going into Q4. With PPI peaking in September ’08, the annual reading in August still yielded a discount in energy of 14.3%. However on a sequential basis, PPI gained 1.1%.
As changes on the margin matter for our analytical process, it’s worth noting the divergence between comparing components on an annual versus sequential basis: while heating oil, diesel, and gas fell 34.9%, 20.5% and 8.5% respectfully annually, sequentially the components rose 11.5%, 5%, and 4.6% versus the previous month.
We see Germany slowly moving out of a deflationary environment into Q4. We expect a steady rise in CPI, which currently stands at -0.1% in August (annually, Eurostat) and that as inflation moves out to 2010 the ECB will need to raise rates to stem inflation. The danger therein lies that the stronger economies of the Eurozone (ie. German and France) stand to benefit from a rate hike at the expense of the weaker ones (ie. Italy, Spain, Portugal, Ireland, to name a few).
On balance we continue to be bullish on Germany but are not invested in Europe on the long side. Currently we’re short the UK via the etf EWU.
Matthew Hedrick
Analyst
