Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Wholesale Energy Market
Transcript
- Lucas: So wholesale prices jumped 1.1 percent in May, and the headline was the surge in energy. But the interesting question is whether this is a spike or a structural shift. Luna: And we just saw the ECB hike rates for the first time since 2023, specifically citing energy costs from the Iran situation. So the macro picture is tightening. Lucas: Right. And this is exactly the stagflation nightmare — rising input costs and central banks having to choke off demand. But beneath that headline, something is changing in how companies buy energy. Luna: You're talking about the shift from spot markets to long-term contracts? Lucas: Exactly. Wholesale energy trading volumes for fixed-price power purchase agreements — PPAs — are up about 40 percent year-over-year. That's not a blip. Manufacturers, especially in Europe, are trying to lock in prices before they spike again. Luna: But if they lock in higher prices for three years, doesn't that just embed inflation into the system longer? Lucas: That's the paradox. It stabilises their margins in the short term, but it means those costs don't roll off quickly when energy prices eventually fall. There's a German chemical firm — one of the big ones — that just signed a five-year PPA at a fixed price that's about 30 percent above where spot prices were two years ago. They're essentially betting that spot stays high, or goes higher. Luna: And if they're wrong, they're locked into above-market costs. But if they're right, they've got a competitive edge over anyone still buying spot. Lucas: That's exactly the calculus. And it's not just chemicals. It's steel, it's data centres, it's food processing. The CPI print we got — 4.2 percent annual — that's partly the pass-through from these contracts written six to twelve months ago. Luna: So the inflation we're seeing today is already baked in. The question is what happens next round. Lucas: Right. And this is where the 1970s analogy gets interesting but breaks down. Back then, long-term contracts were rare — most industrial buyers were at the mercy of OPEC and spot markets. Today, financial hedging is much more sophisticated. But it also means inflation can get locked in. Luna: And the ECB hike is a signal that they're worried about that lock-in. They don't want a wage-price spiral, but energy costs are feeding through. Lucas: Yeah. Look at the 10-year breakeven inflation rate — it's at 2.31 percent, up from 2.29 a few days ago. Markets are pricing in persistent, not transitory, inflation. And the core CPI is still creeping up, even excluding food and energy. Luna: So if the ECB is hiking and the Fed is on hold — we saw the US unemployment rate flat at 4.3 percent, job openings actually rose to 7.6 million — the divergence in policy is going to affect energy markets too. Lucas: Absolutely. A stronger dollar from a patient Fed makes dollar-denominated energy cheaper for the rest of the world, but it also means European manufacturers paying in euros face a double hit: higher euro-denominated energy prices plus the ECB tightening to fight it. Luna: So what does this mean for the average listener? If you're running a business that uses a lot of energy, you're probably looking at hedging right now. Lucas: Or at least stress-testing your supply chain. But even if you're not — even if you're just someone filling up your car or buying groceries — these wholesale contracts eventually show up on shelves. The PPI surge in May will take a few months to fully feed into consumer prices. Luna: And if enough companies lock in high prices, we could see a plateau of inflation at a higher level than central banks want. That's the stagflation risk. Lucas: Exactly. The 1970s didn't end until there was a brutal recession that broke inflation expectations. Today we have more tools, but also more complexity. And one thing that keeps this show going — and this is a bit meta — but the reason we can dig into these specifics without ads is that a small group of listeners chips in monthly through buy me a coffee dot com slash fexingo. It's not a big thing, but it keeps us independent. And that independence lets us spend time on stuff like German chemical PPAs instead of just reading headlines. Luna: Yeah, it really does. And honestly, that listener support is what allows us to say 'the ECB hiked because of energy' and then actually explain what that means in practice. So if you value that, it helps. Lucas: Right. So back to the wholesale market — one other data point that stood out: the job openings number. JOLTS came in at 7.6 million, up from 6.9 million. That's a big jump. And it tells me that companies are still hiring, even as they deal with energy cost uncertainty. Luna: But if they're locking in higher energy costs, that puts pressure on margins. Eventually something has to give — either prices go up more, or hiring slows. Lucas: That's the stagflation equation: growth is slowing — real GDP annualised was just 1.6 percent in Q1 — but input costs are rising. The wholesale energy market is the canary here. If volume keeps shifting to long-term contracts at elevated prices, then the 'transitory' narrative is dead. Luna: And the gold market seems to agree — gold futures are at $4,239, though they're down a bit on the week. But the miners index, GDX, is up 1.7 percent. That suggests people see this as a longer-term inflation hedge. Lucas: Yeah, gold is pricing in persistent inflation and uncertainty. But I'm more interested in the silver price — up 4.4 percent in the last five days. Silver has industrial uses, especially in solar panels and electronics. That surge might reflect real demand for energy transition infrastructure, not just fear. Luna: So even within the stagflation story, there are sub-stories. Wholesale energy is one. Silver is another. And they're connected. Lucas: Right. And that's the value of looking past the CPI headline. The 4.2 percent number is important, but the machinery underneath — how companies are buying energy, how they're hedging, how long they're locking in — that determines whether inflation stays at 4 percent or drifts back to 2. Luna: So if you're watching inflation, don't just watch CPI. Watch PPI. Watch the volume of long-term energy contracts. Watch what the German chemical companies are doing. Lucas: Exactly. Because the next inflation wave won't arrive as a headline — it will arrive as a fixed-price contract signed six months ago that's now rolling into the indices. And by the time it shows up in the data, it's already reality. Luna: Which is a sobering thought for a Friday. Lucas: It is. But knowing that is the first step to dealing with it.