The inflation rate in Germany is expected to hit 7.9% for the month of May, up by roughly one-tenth of the record-high rate seen in April 2022, according to the Federal Statistical Office of Germany.
The figure, based on the consumer price index (CPI) and compared with prices from the same month last year, marks the highest inflation rate in Germany since reunification, hovering around a similar level recorded in 1973/1974 after an oil crisis.
The Federal Statistical Office of Germany, also known as Destatis, said the primary reasons behind May’s expected record-high inflation are Russia’s invasion of Ukraine and skyrocketing energy prices, which surged 38.3% compared with the same period last year. Food prices are up 11.1% over the same period.
"Since the beginning of the war in Ukraine, the cost of energy has noticeably increased, substantially affecting the high rate of inflation," the Destatis statement said.
"Another factor with an upward effect on prices is interruptions in supply chains caused by the COVID-19 pandemic," it wrote.
Just like elsewhere in the world, the inflation rate has been increasing at a fast pace, significantly affecting consumers’ purchasing power as they face substantially higher prices of goods and services. Some analysts believe the whole of Europe could see an average inflation rate of 6% this year.
Germany, which has the largest economy in Europe, is looking at several policy moves to curb the inflation and help consumers, including discounts for regional public transport between June and August, as well as cheaper gas prices for drivers.
EU Inflation Hits New Record… Again
Rapidly rising inflation does not only affect Germany, but also the entire Eurozone, hitting a record high for a seventh consecutive month in the region.
Inflation hit as much as 8.1% in May in the Eurozone, as per preliminary data from Europe’s statistics office. This compares with April’s record high inflation of 7.4% and topping the analysts’ expectations of 7.8%.
The inflation surge in the region was driven by a sharp increase in prices of goods and services in Germany and France, where inflation also topped expectations this month, hitting 5.8%, up from 5.4% a month earlier. Consumer prices in Spain soared by 8.5% in May, also above the estimates of 8.1%.
On the back of this month’s CPI figures, EUR/USD weakened again, although the pair is set to record the best monthly performance in a year as Forex analysts see the European Central Bank soon increasing rates to combat soaring inflation.
The record-high annual consumer price surge was mainly fuelled by higher energy prices, which increased 39.2% in May, while food, alcohol and tobacco prices soared 7.5% in the month. Even when energy and food prices are excluded, inflation rose from 3.5% in April to 3.8% this month.
Surging food and energy prices received an additional boost following Russia’s invasion of Ukraine, which resulted in blocked exports as Western countries imposed harsh sanctions on Russia to decrease their reliance on its gas.
On Monday, European leaders agreed to ban 90% of Russian crude oil by the end of 2022, driving the prices even higher. European Council president Charles Michel said the ban will hit 75% of Russian oil imports.
ECB In Focus
Meanwhile, all eyes are on the European Central Bank and how it will approach its next monetary policy step as data suggests a new inflation record going forward.
The majority of economists forecasted further acceleration in price increases, with the consensus estimates currently standing at 7.8%. Out of the four largest eurozone economies, only Spain will not show rising inflation.
ECB representatives are having a heated public debate over interest rates and are expected to speak out before the June 9 decision closes on Thursday. While in the U.S., commercial banks continue to offer positive interest rates, the ECB has implemented negative rates since 2014.
At the same time, talks between staff at Frankfurt and other European central banks are also expected to intensify as they finalize their estimates for President Christine Lagarde to disclose next week, along with a series of tightening measures planned through September.
Klaas Knot, a governor of the Dutch central bank, did not rule out a hawkish half-point hike similar to the U.S. Federal Reserve’s move earlier this month. Knot said inflation and its related underlying metrics will be key data to keep an eye on over the coming weeks.
“These new numbers are extremely important to determine the speed at which rate hikes will need to happen,” said Giorgio di Giorgio, a professor at Luiss University in Rome.
Last week, Lagarde said that the “disinflationary dynamics of the past decade are unlikely to return” even after the supply constraints ease. Consequently, it seems appropriate for policy to come back to more normal settings, Lagarde added.
Lagarde signalled the most likely outcomes of the central bank’s following policy decisions, including an end to bond purchases, and quarter-point rate hikes in July and September to mark the end of the sub-zero monetary policy.
How To Protect Against Soaring Prices
Extremely high inflation figures for May will not surprise many investors given the fact this has been a dominant theme in 2022. Bonds, defensive stocks (utilities and healthcare) and real estate are some of the most commonly discussed options at disposal for investors to preserve cash.
Additionally, commodity prices are also soaring on the back of the Russian invasion of Ukraine with some investors preferring to channel money into oil to take advantage of surging energy prices. Similarly, gold has always been seen as a hedge against inflation.
Other investors are actually sticking to the forex market. Some are turning to exotic currency pairs due to rising prices in the US and Europe. “We’ve always thought the market has underestimated the macro risk that inflation poses,” said Paresh Upadhyaya in December of 2021. Upadhyaya serves as the senior vice president and director of currency strategy at Amundi Pioneer, which manages more than $300 billion.
In a different direction, some traders are turning to the leading forex brokers to actually buy the greenback. Morgan Stanley (NYSE:MS) believes that the U.S. dollar and inflation-adjusted yields will see higher demand from the Fed’s hawkish position, at least for the immediate future. And so far, this has been the case. The USD has strengthened against all other major currencies—but this strength has not come with risk, either.
Inflation at multi-decade highs was always destined to be a huge concern for investors although it remains to be seen for how long these CPI levels will persist—and how currencies will react.