While producers have begun to pass through the higher costs of manufacturing to consumers, elevated producer price growth continues to bite into their margins and complicate demand planning. Inflation will remain elevated throughout 2022, but a gradual increase in capacity and some easing in commodity prices in mid-2022 should ensure a gradual alleviation of existing pressures. However, MNCs should expect to see acute price sensitivity and pronounced operational difficulties throughout next year.
Overview
Supply bottlenecks and labor shortages have become notably more acute in Q4 2021 and show little signs of easing in Q1 2022. Producer prices across the eurozone reached a record 21.9% YOY increase in October. Industrial sub-segments in Northern Europe have been more severely impacted by ongoing shortages, but the deterioration in output is present throughout the whole of Europe. Light manufacturing sub-segments are experiencing fewer difficulties in accessing supply, but it is unlikely that output will accelerate substantially in absolute terms in Q1 2022.
Our View
Producer prices across Europe will remain elevated throughout H1 2022 despite early indicators that transport costs have likely peaked in Q4 2021. Supply shortages and logistics bottlenecks will continue to weigh on total industrial output, but local producers will likely continue to adapt their supply chains, which combined with the ongoing increase in semiconductor production should alleviate some of the existing pressures. A gradual easing of energy prices and increased capacity should result in a steady decline in producer price growth throughout H2 2022, but costs in absolute terms are likely to remain elevated and continue to bite in producers’ margins.
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