The high inflation in the Netherlands is not yet ready to fall. This is evident from the inflation figures for January, which were published on Wednesday by Statistics Netherlands (CBS).
According to the European calculation method (the ‘HICP index’), inflation in the Netherlands was 7.6 percent last month. That is the highest figure since December 1976. Dutch inflation is also one of the highest in the eurozone.
Only next week, CBS will publish the inflation figure according to its own national definition. This is usually slightly lower than the European HICP figure, because housing costs are taken into account differently. But even ‘nationally’ there could be inflation of around 7 percent next week. In December last year, inflation was 6.4 percent according to the European definition, and 5.7 percent according to the national definition.
The partial figures that are available indicate that energy (gas, car fuels, electricity) will continue to be the main driver of inflation in January, with a price increase of 58.4 percent. That is up from 53.1 in the previous month. Food prices rose 4.2 percent, a significant acceleration from 2.4 percent in December.
Washing machines and crockery
Without energy and food, Dutch so-called core inflation amounted to 2.7 percent in January. That’s more than December’s 2.3 percent, and a possible sign that high inflation is starting to set in more broadly. The industrial goods category, also available as a partial figure, also shows this. Prices there – from washing machines to crockery to laptops – rose by an average of 3.5 percent.
Inflation also rose in the eurozone as a whole: from 5 to 5.1 percent. That is higher than most analysts had expected. The German figure in particular stands out. There, the effect of an earlier VAT increase disappeared from the figures, and a sharp decrease was now expected. Inflation did indeed fall from 5.7 percent in December to 5.1 percent in January, but much less than analysts had expected.
Inflation has risen sharply in the Baltic States. This has a lot to do with the tensions around Russia and Ukraine. Outside of that, Slovakia (8.5 percent) and Belgium (8.5 percent) have the highest inflation rates. Then the Netherlands follows, with 7.6 percent inflation. The most modest price increase took place in France (3.3 percent), partly because the government intervenes in the rise in energy prices.
Long-term discomfort
A small windfall is that core inflation in the eurozone, ie excluding energy and food, is falling slightly, from 2.6 percent in December to 2.3 percent in January.
Still, the numbers are feeling increasingly uneasy for economists who have argued in recent months that inflation would be short-lived. The shortage of all kinds of products, which arose during the corona crisis, would disappear, and the rise in energy prices would also level off on its own. In the worldwide debate they were given the name Team Transitory, the Team-of-transient-kind. In the United States, for example, Nobel Prize economist Paul Krugman to be a member of this ‘team’. But inflation is not going to budge, not even in the US, where it stood at 7 percent in December. Recently, during a debate with Larry Summers, another top economist, Krugman had to admit that he… underestimated the inflation trend.
The European Central Bank also called inflation ‘transient’, at least until October last year. In recent weeks, the ECB has used the word transitory quietly withdrawn from communication, although bank president Christine Lagarde continues to insist that inflation is decreasing this year, based on ECB estimates.
The ECB board will meet this Wednesday and Thursday. The newly-appointed chief of the German Bundesbank, Joachim Nagel, recently warned of the risk that inflation “will remain at a high level longer than now estimated in projections”. The ECB estimated in December that inflation in the eurozone will be 3.2 percent for the whole of 2022, before falling to 1.8 percent in 2023 and 2024.
Interest up?
New estimates won’t be released until March, but investors and other ECB followers will look for clues to a change of course during Lagarde’s press conference on Thursday. Unlike the US central bank, the Federal Reserve, the ECB has not yet hinted at an interest rate hike in 2022. The classic means for central bankers to curb inflation is to raise interest rates. Borrowing money then becomes more expensive, so that consumers and companies will in principle spend less money. This should keep the price rises down.
Also read: The inflation has risen again. Why does the ECB not dare to raise an interest rate?
ECB interest rates are extremely low. The interest rate for banks that deposit money at the ECB, the deposit rate, is minus 0.5 percent. In December, Lagarde said that a rate hike this year is not yet on the agenda; First, the ECB is slowly phasing out the purchase of government debt, which is pushing interest rates on the capital markets, this year.
This Wednesday’s inflation data is increasing pressure on the ECB to intervene against price increases. Investors on Thursday will be on the lookout for indications of potential past rate hikes.
The scenario of higher interest rates has led to unrest on the stock market in recent weeks. Higher interest rates have a negative effect on share prices. A higher interest rate means a higher return on government bonds, making equities relatively less attractive as an investment. Also, future profits of companies are lower if the expected interest rate is higher. And this affects the share price of those companies now.