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Germany profit squeeze seen limiting risk of renewed inflation surge

ING economists project German inflation will stay above 3% into year-end, but they expect no repeat of 2022’s double-digit surge as pricing power erodes and companies absorb costs through profit squeezes.

Reported · Written up by our desk · Central Banks

ING economists Carsten Brzeski and Franziska Biehl say Germany is likely to see inflation rise above 3% and remain elevated into year-end, but they do not expect a repeat of 2022’s double-digit surge.

They attribute the softer inflation outlook to weaker demand, a softer labor market, and the disappearance of pandemic savings, which together reduce households’ willingness and ability to pay higher prices.

The economists argue that cost pressures are increasingly absorbed in corporate profit margins rather than passed through to consumers, with implications for the pass-through of higher energy prices into final consumption.

They also note that while surging energy prices and the war in the Middle East have pushed up headline eurozone inflation, Germany’s impact appeared temporary, helped by the government’s two-month fuel tax rebate, leaving August inflation at 2.9%.

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