Another inflation shock, is it the sell-off?

The latest inflation figures are another shock. On the EU measure (Harmonized Index of Consumer Prices, HICP), inflation in our country rose from 6,4% year-on-year in December to 7,6% in January. Many details are not yet known. Energy and food were apparently two main culprits. CBS will publish the figures next week according to its own national series.

In January, the general price level in our country almost always falls compared to December. This is mainly due to the 'sale'. Clothing stores are usually at the forefront of this and we can see that in the statistics. 'Clothing and footwear', which has a weight of 6,4% in the inflation basket, became on average more than 2015% cheaper in the month of January from 2021 to 9. Household appliances also invariably become cheaper in January. This year, the stores were closed for weeks in January. The water is on the lips of entrepreneurs. I suspect that much less of those falling prices because of the sale has happened this year. And yes, then the year-on-year inflation rate increases.

If I am right that the high inflation figure for January is partly due to the largely absence of the sell-off this year, then the figures for February should be better than expected.

For the eurozone as a whole, inflation stood at 5,1% in January, compared to 5,0% in December. Excluding food, energy, alcohol and tobacco, inflation actually fell slightly: to 2,3% from 2,6% in December. Although the figures for January are shocking for the Netherlands, a hopeful pattern is emerging. As mentioned, I suspect that the largely absence of a sell-off effect in our country has played an important role and that we will see that reverse in February. In addition, the Eurozone figures show that industrial goods (excluding energy) inflation is decreasing.

Industry price pressure less due to reduction in logistics disruptions
That is in line with the experience in our country. Statistics Netherlands published figures on the output prices of the industry this week. The biggest increase seems to be behind us now.

According to the January results of the monthly survey of industrial companies published by the NEVI, upward price pressures are easing as logistics disruptions ease. For the first time in eighteen months, the stock of finished product at companies is no longer decreasing. Apparently semi-finished products and raw and auxiliary materials arrive at a pace that is equal to the production level. Open orders are still rising, but in January the increase was the least since December 2020. Hopefully this trend will continue and inflationary pressures caused by logistical disruptions will ease further in the coming months.

We will then see how far and how fast inflation falls here and elsewhere. I don't think it will drop below 2% anytime soon, but in a year's time we will be a lot closer. It can hardly be otherwise than that inflation is currently close to its peak.

Omikron has more effect on politicians than on consumers
Towards the end of November, restrictions on public life in our country were tightened and a week before Christmas even a hard lockdown became effective. The measures in the Netherlands were more draconian than in neighboring countries. The development of retail sales paints an interesting picture of consumer behavior under these conditions. To do this, view the following chart.

When the pandemic broke out in the first part of 2020, consumers briefly lost their minds. But soon, with great enthusiasm, people threw themselves into what my daughters call 'retail therapy'. Less could be spent on services. The money saved and extra free time whipped up retail sales over the course of 2020 and remained so as restrictions eased somewhat over the summer. When the virus regained the upper hand in the latter part of 2020 and new lockdown measures became effective, consumers were shaken and retail sales shrank. Apparently we had bought enough stuff. Things then got better in the spring of 2021, but the growth rate of retail spending did come to a more moderate pace last summer.

Despite the draconian measures recently taken a week before Christmas, retail sales growth held up reasonably well in December 2021. I have to say that this is partly a price effect and also partly due to a base effect. Yet…. Apparently, these measures have less and less grip on the consumer, while the government just panicked slightly. Applause to ourselves! Hopefully we have continued this performance into January.       

Reduction of logistical disruptions
Inflation rose unexpectedly and very strongly in our country in January. Yet we should not despair. I strongly suspect that there was hardly any sales. If I'm right, then inflation should fall quite a bit in February. Fingers crossed! In addition, companies report a decrease in logistics disruptions. This is already reflected in diminishing price pressure in the industry. There is still a long way to go in this area, but inflation is sure to fall over the course of the year. How quickly that will happen remains to be seen. Incidentally, it could just be that, once the dust has settled, we will end up staying on a somewhat higher inflation path than before the pandemic. Hopefully the ECB will see that as a good reason to normalize monetary policy.

In the meantime, the Dutch economy continues to grow reasonably well. The economy in Germany contracted in the fourth quarter, but if I look at production in manufacturing, the development of the labor market and the retail turnover in our country, I suspect that our economy has registered a reasonable growth in the last quarter of 2021 .

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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