Our inflation is heading in a different direction than the rest of the world

While inflation is rising just about everywhere in the world, ours is actually falling. At least, if you look at the latest numbers. Inflation rose above 5% in the United States and in the eurozone as a whole from 0,9% in January to 2,2% in July. But in the Netherlands, inflation has actually fallen since January: from 1,6% to 1,4% in July.

I should add that inflation was volatile from month to month last year. In the last five months of 2020, our prices fell by 0,8%. That will no doubt not happen again. It therefore seems a safe conclusion that our inflation will pick up again in the coming months. And the fact that inflation fell from 2% to 1,4% in July was not because prices fell in absolute terms, but the increase was less than the 1,1% month-on-month increase in July last year.

Be that as it may, the question is why our inflation is moving in the opposite direction. According to the Central Bureau of Statistics, an important explanation for the decline is that house rents were only 0,8% higher than a year earlier, compared to 2,9% in June. This has to do with the ban on rent increases on regulated rents. And even rent increases in the free sector are currently regulated, in the sense that for three years the increase should not exceed the rate of inflation plus 1%.

Now I believe in the usually beneficial effects of market forces and I am convinced that government intervention in the pricing process does more harm than good, although sometimes it is unavoidable. So when I read the comments from the Central Statistical Office, I immediately thought of the Eastern European conditions before 1989. Of course, with maximum prices you can keep inflation in check. But simple price theory shows what happens when a price is set that is below the equilibrium price (where supply and demand are equal). At this price, demand exceeds supply and shortages and queues arise. That describes the situation on the housing market very well.

It is also interesting that inflation was actually driven up by electricity prices, which were 15,8% higher in July than a year earlier, compared to +6,3% in June. I have not looked into this in detail, but I suspect that this is a result of the energy transition policy, although part of the higher prices may be due to increased international energy prices. Another example of how our government sometimes plays an important role in inflation statistics.

What the government has less to do with is prices for holidays. According to figures from the Central Bureau of Statistics, a stay in a holiday park was 6,3% cheaper in July than in July 2020, compared to +3,7% in June. I am not an expert by experience, but I suspect it has to do with the fact that more people are going on holiday abroad this year than last year.

Dutch business confidence remains strong
According to the index of IHS Markit/NEVI, Dutch producer confidence in manufacturing fell slightly for the second month in a row: 67,4 against 68,8 in June and 69,4 in May. The long-term average of this series (going back to 2000) is at 52 and the July reading was the third highest.

The big question for the industry is to what extent the supply problems of raw materials and semi-finished products hinder production. According to the NEVI press release, the supply problems are still leading to price increases. Still, the report does offer hope that some improvements are on the way. There is: "Supply chain delays remained severe, despite some evidence of reduced pressure compared with the second quarter."

Frankly, I find that a tad cryptic, but a child's hand is quickly filled. We long for normalization in this area. Further on, the press release also says: "…the extent of delays was less severe than those registered during the second quarter. Manufacturers continued to build safety stocks to guard against disruption to output, and remained strongly confident of higher production over the next 12 months."

Delivery problems in Germany continue to increase
In Germany, the problems tend to get worse. Industrial orders rose 4,1% in June, after falling 3,7% in May. At the time, I feared that the drop was a sign that customers may have been discouraged by the delivery issues and therefore stopped placing orders. So far, that fear turned out to be unjustified.

In contrast to the volume of orders, production in June fell for the third month in a row: -1,3% month-on-month, while the May figure was also revised down 0,5%. The graph below shows how much orders and production are now diverging. The gap has now grown to 20%. That must mean that a tidal wave of production will manifest when the supply problems are over. That could take a while, however.

Comparing the levels of orders and production to a year ago is not very meaningful, as the collapse in activity last year caused significant base effects. In the following chart I therefore show a comparison of the level of orders and production with 24 months earlier. The volume of orders is now more than 12% in the plus, a more than healthy increase over such a period, while production is more than 7% in the negative. That last one is bad. However, it also shows the potential for a very powerful recovery.

Korean trade figures give hope
Korean trade figures show that things may be improving with logistics in the world. Korean statisticians are always on the go and have reported export and import figures for July, although they add that the figures are provisional. Here too, basic effects play tricks on us. In the year-on-year comparison, very significant pluses are recorded.

But even when the figures are compared with those from 2019, they turn out to be strong. Korea's exports were 20,5% higher in July than in July 2019 and imports were even 22,2%. I must say that these are nominal figures. It is not yet known how prices developed in July. In June, export prices were 6% higher than two years earlier and import prices more than 14%.

Employment opportunities
In July, employment in the United States increased by 943.000 jobs. It was the largest monthly increase since August last year. The figures for the previous two months were also revised upwards together with 119.000. The unemployment rate fell from 5,9% in June to 5,4%. In April, the recovery of the labor market seemed to have stalled, but now there can be no doubt about it, the recovery is continuing very vigorously.

There has been quite a bit of discussion in the United States about unemployment benefits in recent months. To alleviate the distress of the army's unemployed, the government introduced a temporary unemployment benefit of $300 a week last year. This then came on top of the benefits paid by the individual states. The Biden administration has extended the duration of that benefit until September 6. In recent months, the labor market has been tightened and it has been argued that high benefits were preventing people from looking for jobs. The governments of many states have therefore decided that previously unemployed people in their state could no longer claim benefits. In June, that benefit was stopped in several states. The extent to which this contributed to the strong job growth in July is not very clear, but it seems likely.

Figures suggest wage growth is accelerating
There is also a debate as to whether wage growth is accelerating or not. The figures for July indicate that this is the case. Average hourly wages increased by 0,4% compared to June and 4,0% compared to a year ago. Unfortunately, the development of average hourly wages is sometimes difficult to interpret. Due to the major shifts in the labor market, these figures suffer from a so-called composition effect. When employment collapsed, average hourly wages rose sharply as job losses were concentrated in relatively low-wage sectors.

With 380.000 new jobs, the leisure and hospitality sector accounted for a significant part of the increase in employment in July. This is a sector with relatively many low-paid jobs. Due to the strong job gains in that sector, you would expect this to slow down the increase in average hourly wages. However, the figures do not confirm this. On the other hand, the figures are not so convincing that the discussion among economists about this can be closed. That would be a shame too, wouldn't it?

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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