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The new order: Large shifts in pricing powerin Europe – GS

FXStreet (Barcelona) - Analysts at Goldman Sachs highlight that the recent moves in pricing between CPI, PPI, import inflation and commodity prices point to large shifts in relative pricing power for companies in Europe.

Key Quotes

“In recent months we have seen large falls in both commodity prices and inflation expectations. For listed European companies, the disinflationary pressure is even more aggressive. Weighting the components of CPI and PPI by their sector sales-weight in the market, we estimate selling prices are down 0.5% yoy. But while selling prices are under pressure input costs are falling; inflation in imported raw materials has been running at -4% to -7%. For those companies selling to the consumer, or at least with some pricing power, the relative moves in pricing should be supportive.”

“..we estimate that selling prices for corporates are down 0.5% over the past year, a reflection largely of the high percentage of the equity market in commodity-facing sectors.”

“While selling prices are under pressure, many input costs are falling sharply. The fall in commodity prices is dragging down producer prices and the cost of imported goods for companies. Inflation in imported raw materials has been running at -4% to -7% in the last few months so for those companies selling to the consumer, or at least with some pricing power, the relative moves in pricing should be supportive”

“The sectors most positively correlated with inflation are in commodities or manufacturing. When inflation is higher, it is often because growth is improving and commodity prices are rising and sectors in these industries are able to push up prices.”

“Lower energy prices, and more broadly lower commodity prices are likely to flow through to lower costs of production (via lower producer currencies or via reducing costs of fuel/explosives/tyres etc.) and thus lower cost support for commodities in balance/surplus.”

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