Borrowing costs

More German inflation will lead to higher borrowing costs

Europe’s largest economy continues to struggle economically.

German inflation hit 8.5% in July, which was not only above the 8.1% expected by analysts, but will likely mean the European Central Bank will raise borrowing costs in September, according to a recent report. .

“This will support what we assume to be the majority view of the ECB that a further rate hike of at least 50 basis points [half of one percent] is needed in September,” says the research note from London-based Capital Economics.

The problem for Germany and Europe as a whole is that inflation shows no signs of slowing down anytime soon. “Food inflation rose from 12.7% to 14.8%,” the report said.

And energy prices are expected to rise further later this year. The Kremlin recently cut its natural gas deliveries to Europe and, based on its past behavior, will likely continue to do so. This matters a lot because Europe in general and Germany in particular are heavily dependent on Russian gas to generate electricity, an essential resource for industry and consumers.

Such energy shortages could become a problem, according to the Capital report:

  • “Looking ahead, soaring natural gas prices could push energy inflation back up in the coming months, depending on the extent of government interventions to shield households from costs.”

Natural gas recently cost nearly $200 per megawatt hour, down from about $40 a year ago. It peaked at $228 in March, according to data from Trading Economics.

These high prices will quickly eat into corporate profits and household budgets unless the government continues its subsidies. However, this seems unlikely to be sustainable as the economy slows and tax revenues decline.

In normal times, one could say that Germany is caught between a rock and a hard place. But perhaps given Russia’s influence on energy prices, it might be better to say “a rock and a hard man.”

In other words, there doesn’t seem to be an easy road to Germany anytime soon.