Dutch inflation at highest level since 2002

Inflation in our country stood at 3,4% year-on-year in October. That was the highest level since 2002 and significantly higher than the 2,7% in September. More than 3,4% of the 1,9% comes from increased energy prices. Oil and gas prices are currently stabilizing in world markets. If this continues, the worst may be behind us in energy prices. However, inflation could still rise further. Prices fell quite sharply in October last year, so a 'base effect' could push inflation even higher in November.

Incidentally, I repeat once again that our inflation figure is artificially suppressed because the government has intervened in housing rents. In the social sector, they are not allowed to increase this year, and restrictions have been imposed on the increase in the free sector. House rents and rents imputed to homeowners make up no less than 23% of the inflation basket. Excluding rents, our inflation rate would have been 4,2% in October, in line with the eurozone's 4,1%. I now hear people complain that the prices of groceries are clearly rising.

Inflation has risen even more in the US than in the United States. And according to the Institute of Supply Management's monthly survey, the vast majority of entrepreneurs report that the prices they have to pay continued to rise in October. An observation above 50 in the following chart implies that more entrepreneurs say that the prices they pay are increasing than that that entrepreneurs report price decreases.

Fed boss Powell honest about inflation
The policy committees of the US Fed and the Bank of England met this week. Actually, the Bank of England meeting was the most exciting. The policy was not changed, but two of the nine members voted for a rate hike and three of the nine voted to stop bond buying immediately. This meant that these people were in the minority, but that may be different at the next meeting.

Last week, I think I was being a bit rude about ECB chief Christine Lagarde. Fed chief Jay Powell's press conference this week was a breath of fresh air. The Fed decided as early as this month to start cutting bond purchases. Economic developments justify such emergency policies less and less. If the rate of cutbacks does not change, the Fed will stop buying bonds from the end of June 2022.

Powell was particularly honest about the inflation outlook. While Lagarde last week said she was confident in the ECB's inflation forecasts, Powell said current inflation dynamics are very uncertain and the Fed should be "modest" in its forecasts. The Fed continues to think the high inflation is 'transitory', but Powell explains that he is saying nothing about how long the high inflation will last, only that the factors that are currently pushing inflation up are transient. He rightly noted that goods and commodities are currently the biggest driver of inflation, whereas before the pandemic it was the services sector. Powell sees this as an indication that the current inflation is mainly caused by bottlenecks in the production process and international transport. They will no doubt be transient. I noticed this week that the largest container carrier in the world, the Danish Maersk, said that the problems in transport will continue well into 2022.

Asked whether the accelerating wage growth could lead to a wage-price spiral, Powell said that only happens when wages rise faster than productivity. And that, he says, is not yet the case. Unlike at the Bank of England, there were no "dissenters" (members voting against the proposed policy) at the Fed meeting.

US economy recovers from delta variant
US economic growth appears to be gaining some momentum. In the third quarter, growth was very modest, but the fourth quarter looks much stronger. According to the Atlanta Fed GDPNow measure, the US economy is currently trading at a rate of 8,5% (annualized) growth in the fourth quarter, well above the 2,0% achieved in the third quarter.

The labor market is also recovering further. The number of new jobless claims fell to 269.000 this week, the lowest number since March 19 last year. Incidentally, at the beginning of 2020, slightly more than 200.000 applications per week were booked.

Powell was asked at his press conference if it was already time to raise interest rates with inflation so high and the economy continuing to recover. He replied that the Fed's job is also to ensure "maximum employment." Powell added quite frankly that the Fed also doesn't know exactly when "maximum employment" will be reached. There are currently still about five million (or more than 3%) fewer people than before the pandemic. But whether they all want to return to a job is uncertain and actually also unlikely. The Fed doesn't seem to want to raise interest rates until at least a significant portion of those five million people are "found" and back to work.

Business confidence in the US services sector reached an all-time high in October according to the ISM measure (figures go back to 1997). Confidence in the industry weakened slightly, but remains at a high level: 60,8, versus 61,1 in September. These indices point to continued solid economic growth.

German industry remains in trouble
The problems of German industry are well known. There is demand for German products, a lot in fact, but insufficient production is possible due to shortages of semi-finished products, etc. The problems in the automotive sector are particularly serious. The following chart shows what I have shown many times in recent months: that the order books are well filled, but that production cannot keep up. The question then is whether all orders will actually lead to production when the problems relating to the delivery of semi-finished products have been resolved. Another question is whether customers will cancel orders.

Manufacturing production fell by 1,5% in September compared to August (-1,1% including construction). In August, production had already fallen by 4,2%. For the first time in months, there is also a minus sign for the year-over-year change: -1,3%. If measured from December last year, the decrease in production has now reached 7,1% and when compared with the highest level of the production index in 2018, the counter stands at -16%! Once production will pick up, but when?

ING's Carsten Brzeski writes from Frankfurt in a commentary that the only positive thing about the figures is that it can hardly get any worse. I would like to tell my German friend that they also thought the same at Borussia Dortmund after the 4-0 in the Johan Cruijff Arena… But it won't get much better soon either.

China slows further
The Chinese economy grew by just 0,2% in the third quarter. We already knew that. Judging by business confidence figures in October, things are not getting any better for the time being. According to NBS measures, confidence among industrial entrepreneurs fell from 49,6 in September to 49,2 in October. In the service sector, it went from 53,2 to 52,4. The following picture shows the composite index. Before the pandemic it fluctuated between 52 and 54, now the index has been below it for months. I have to say that Caixin's rival index paints a slightly more positive picture.

Humble with predictions
These remain interesting times for economists. With Fed chief Powell, I say economists should be modest about how confidently they can predict the future. The global economy growth. But that growth is negatively affected by the logistical disruptions and disruptions in production chains. The disruptions are certainly temporary, but no one knows how long it will take for things to normalize. The question is what will happen to the global economy then. US economic growth appears to be picking up again after some slowdown in the third quarter. The Chinese economy, on the other hand, appears to be losing momentum. Whether this is the result of policy choices or temporary in nature due to lockdown measures is not clear. Europe continues to wobble, whereby German industry does not wobble but falters.

Inflation is more persistent than previously thought. Yet central bankers continue to hold on to the view that it is temporary. In other words, the high inflation is transient because the inflation we have seen so far is mainly caused by the aforementioned distortions on the supply side of the economy. The Fed has since begun to cut monthly bond purchases, not because inflation needs to be suppressed, but because its extremely accommodative policies have been in response to the economic and financial impact of the pandemic and such "emergency policies" have declined. justification as the recovery progresses. The Bank of England will also make some policy adjustments in the coming months. Interest rate hikes seem very unlikely to me in the short term. In the eurozone all the way, but also in the US and the UK.

Han de Jong is going on holiday for three weeks. Then he doesn't write. His next weekly column will appear again in early December.

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

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.