German PPI Hits New All-Time High as Electricity Prices Soar

By Geoffrey Smith -- The pressure on the European Central Bank to keep raising interest rates increased again on Tuesday as the Eurozone's largest economy recorded a new all-time high for factory gate inflation. 

German producer prices rose by 7.9% in August, and were up 45.8% from a year earlier, statistics office Destatis said. Both figures were records in the 83-year history of the Federal Republic and were well above analysts' expectations. Economists had expected the PPI to slow to only 1.6% on the month and 37.1% on the year. 

Destatis said the biggest factor behind the development was the surge in electricity prices against a backdrop of increasing problems with output from France's fleet of nuclear reactors. 

These are historically a big exporter of power, but have been dogged both by technical problems and, increasingly, a lack of water flow in France's rivers due to drought. Low water levels in Germany's rivers, particularly the Rhine, also made it nearly impossible to ship coal to power stations in the south of the country. This concern became particularly pressing as Russia all but stopped shipments of natural gas at the end of the month.

Energy prices as a whole were up by 139% from a year earlier and by 20.4% from July. Electricity prices in particular rose 175%. However, the increases weren't limited to energy: prices for intermediate goods rose 17.5% and prices for capital goods rose 7.8%, while durable and non-durable consumer goods rose 10.9% and 16.9%, respectively.

The emergency situation that dominated in August has receded a little in the meantime, with water levels on the Rhine rising to allow navigation. Prices have also come down in reaction to signs of a shift in German policy, notably with regard to the country's last three nuclear reactors. Two of these will now stay active as reserve capacity through the winter, rather than being decommissioned at the end of the year. 

Wholesale power prices have also eased as the European Union has stepped up efforts to reduce demand and change the pricing mechanism that effectively allows gas-fired generators to determine overall market prices. From a peak of over 1,015 euros a megawatt-hour in August, prices for 2023 baseload power in Germany have fallen to 530 EUR/MWh as of Monday. That's still a multiple of where prices have historically traded however, and still represents a direct threat to the existence of many parts of Germany's manufacturing sector. 

Germany is also making steady progress in replacing Russian gas imports. Chancellor Olaf Scholz is set to sign contracts for the supply of liquefied natural gas when he visits the United Arab Emirates on Sunday, according to German media reports on Monday. 

The government has already chartered two floating terminals that will regasify liquefied natural gas and feed it into the German grid from the turn of the year, replacing around a quarter of its usual import volumes from Russia. A further two such Floating Storage and Regasification Units, or FSRUs, are due to start operations later in 2023, meaning that over half of the supplies from Russia will be covered. 

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