Up, up, up. That has been the trend of the inflation figures for months. Until this month. The Dutch inflation rate for November fell on Wednesday, reported by the Central Bureau of Statistics, significantly lower than that of October. Annual inflation, measured according to the European calculation method, fell from 16.8 to 11.2 percent. Inflation in the eurozone fell from 10.6 in October to 10 percent in November, Eurostat reported. This drop in the eurozone figure was, in addition to the decline in the Netherlands, also driven by lower inflation in Germany and Belgium, among others.
Do we see a trend break here? Some caution is advised. These are initial calculations, based on data that are still incomplete. More accurate inflation figures will follow in early December. Moreover, the question is whether the decline will continue in the coming months. Inflation in the Netherlands fell briefly last spring, but then shot up again. But the preliminary figures are striking: the pattern of increasing monetary depreciation is at least briefly interrupted. In the eurozone, this is the first fall in inflation since June 2021.
Just as the increase in inflation in recent months was largely due to the exploded energy prices, the drop in inflation is now a result of energy prices that have risen less sharply compared to a year ago. In October, the price of energy in the Netherlands, including motor fuels, was still 99.7 percent higher than one year previously. In November it was 41.6 percent.
The energy effect
Wim Suyker, former economist at the Netherlands Bureau for Economic Policy Analysis and at the OECD think tank, notes on Twitter that gas and electricity prices increased sharply month-on-month a year ago: between October and November 2021 by 19.8 percent. This means that the difference between annual energy prices was considerably larger in October than in November. This explains the fall in the annual inflation rate, which Statistics Netherlands published on Wednesday.
Incidentally, there is considerable uncertainty about the energy prices measured by Statistics Netherlands. Statistics Netherlands currently calculates inflation based on the prices that households pay for new energy contracts. This while many of the rates actually paid are still based on old contracts that continue. Many people therefore had to deal with smaller price increases than those reported by Statistics Netherlands. Other European statistical offices measure actual energy prices more effectively. Mainly for this reason, inflation in the Netherlands has been much higher in recent months than in most countries in the eurozone. This is also why the fall in inflation in the Netherlands in November is now relatively high. Statistics Netherlands is now working on a new measurement method, which should be ready by the middle of next year.
In addition to energy inflation, inflation in the services sector also fell in the Netherlands, from 6.5 percent on an annual basis in October to 5.4 percent in November, as did industry prices from 7.8 to 7.1 percent. . The rises in the prices of food, drinks and tobacco have continued: inflation in this category rose from 11.5 to 12.5 percent on an annual basis.
Read also: Should interest rates continue to rise so fast? The ECB is divided
Debate at ECB on edge
The latest inflation figures have sharpened the discussion within the European Central Bank about the upcoming rate hike, which is scheduled for a meeting on December 15. The ECB has been engaged in a series of rate hikes since June to tame inflation. The higher the interest rate, the higher the borrowing costs for citizens, companies and governments. This should curb consumption and ultimately price rises.
The fact that inflation now seems to be leveling off somewhat gives ammunition to ECB board members who believe that the pace of interest rate hikes should be reduced. The ECB raised interest rates by 0.5 percentage point in July, by 0.75 percentage point in September, and by another 0.75 percentage point in October. There is division within the ECB board about the course to be followed. A new interest rate hike in December is considered inevitable, because inflation is well above the ECB’s target of 2 percent. But by how much interest rates will rise is the subject of disagreement.
Philip Lane, the ECB’s chief economist, appears to be in favor of a 0.5 percentage point increase, as do some Southern European board members. They fear that too high interest rates will harm the economy too much. Isabel Schnabel, another influential board member, seems more in favor of an increase of 0.75 percentage point.
Core inflation
Within the ECB, the main focus is on so-called ‘core inflation’, from which the volatile energy and food prices have been filtered out. This serves as an indicator of underlying inflationary pressures. This core inflation in the eurozone remained unchanged in November at 5 percent. In the Netherlands, core inflation fell from 6.8 to 6.1 percent. The ECB’s target of 2 percent inflation will only come into view once core inflation starts to fall sharply.
This requires a cooling of the economy, or even a recession. There are more and more signs of that. Dutch consumption in the high street is now falling, according to other CBS figures on Wednesday. Retail sales volume was 5.2 percent lower in October than twelve months previously.