Shocking Dutch inflation higher than elsewhere

According to the European inflation measure, the Harmonized Index of Consumer Prices (HICP), Dutch inflation rose to 11,9% in March from 7,3% in February. In March, prices rose by no less than 4,7% compared to February. Those are shocking numbers. Two days earlier, German inflation had risen from 5,5% in February to 7,6% in March. Spanish inflation rose from 7,6% to 9,8%. So we could already count on a significant increase, but this...

In the eurozone as a whole, inflation rose from 5,9% in February to 7,5% in March. Lithuania leads with 15,6%, the Netherlands takes the bronze. Malta has the lowest inflation rate: 4,6% and in France inflation is remarkably low: 5,1%. If you only look at March compared to February, then the Netherlands takes the lead with an increase of 4,7%, followed at a respectable distance by Spain with 3,9%. I think it's because governments in other countries have intervened more quickly and decisively in energy pricing. Not that I think that's a great idea, but the differences are spectacular. In our country, according to the HICP, energy was 102,9% more expensive in March than a year earlier. In February this was 'only' 51,7%. For the eurozone as a whole, these figures are 44,7% for March and 32,0% for February, respectively. That saves a sip on a liter of petrol. Incidentally, inflation is accelerating across a broad front. Food prices, for example, were 5,5% higher in March than a year earlier (4,6% in February).

Next Thursday, CBS will publish the figures according to its own national benchmark, the Consumer Price Index (CPI). It has been slightly below the HICP for several months now. The main difference between the two indices is that rents imputed to homeowners are part of the CPI and not part of the HICP. Due to the government's tight restraint on rent increases last year, this is currently limiting the rise in the CPI (completely contrary to what you might intuitively expect, but that's what you get when governments intervene in price formation).

Also according to the CPI measure, it will appear that our inflation has risen sharply in March. If the CPI rises as strongly as the HICP, inflation according to the CPI will be 10,8% (I suspect it will be slightly lower). The absolute record dates from November 1974 with 11,0%. So we're getting close to a record.

A figure of 10,8% in March would bring the average for the first three months to 7,8%. In the CPB's base scenario, inflation will be 5,2% this year. That scenario can go in the trash. According to an alternative scenario of the CPB, which assumes a long-term negative impact of the war, inflation will average 7,9% this year. That probably looks more like it. Finally, DNB's economists have recently raised their inflation estimate for 2022 to 6,7%. The ink of that revision is barely dry, but it now seems obsolete.

As of April 1, excise duties on petrol, etc. have been reduced. Then the inflation rate could drop a bit, but for now inflation will remain very high, unless the war ends soon, energy prices fall sharply and the logistical disturbances in the world are quickly resolved. There is little indication that such a dream scenario will unfold any time soon.

The staggeringly high and staggeringly rapid inflation is eroding purchasing power in an unprecedented way. If consumers are not prepared to use their savings, this will lead to a sharp fall in consumer spending in real terms. Fortunately, many households have saved more than usual during the corona pandemic. So there is a buffer, but it depends on the families whether they will use that buffer. There are also households that have absolutely no meat on their bones. It is inevitable that they will then need extra support.

Logistical disruptions are not abating for the time being: pay attention to China
For a year and a half, the global economy has been plagued by logistical disruptions, hampering production and increasing inflation. Nearly 30% of all goods manufactured in the world come from China. For a perspective on these logistical disruptions, it is therefore important to closely monitor what is happening in China. There, lockdowns remain the order of the day, with clear consequences for economic activity.

Business confidence fell further in March, according to the central bank's indices. In manufacturing, the index fell from 50,2 in February to 49,5 in March. An observation below 50 indicates contraction or, in the case of China, very limited growth. The March figure was the second lowest monthly figure since February 2020. In the services sector, the confidence index fell from 51,6 in February to 48,4 in March, even though it was the second lowest monthly figure since February 2020. production in China is currently stalling under the influence of the lockdowns and that it will therefore not get much better with the logistical disruptions in the world.

After October last year, it looked as though the logistical disruptions had eased somewhat. In surveys, producers reported that delivery times were getting shorter. I'm afraid that improvement is being roughly nipped in the bud by the war in Europe and the Chinese lockdowns. That's bad news for the short-term inflation outlook.

Confidence indices are (besides inflation figures) the first economic data now available for the period after the outbreak of the war in Europe. Last week I already reported on the dip in consumer confidence in our country in March. Producer confidence followed this week. That turned out not to have decreased, but to have improved slightly. The following chart nicely illustrates the divergence between consumer and producer confidence.

Dutch entrepreneurs are not only more optimistic than consumers, they are also a lot more positive than their competitors elsewhere. In Germany there is a depressed mood among entrepreneurs. The difference between the Netherlands and Germany undoubtedly has to do with the great importance of the automotive industry in Germany. That sector has been struggling with chip shortages for some time and now appears to be receiving a new blow because they apparently source a lot of wiring from Ukraine. Those supplies are, of course, currently on hold.

I would really like to argue that the numbers show that Dutch entrepreneurs are much smarter than entrepreneurs elsewhere and are much more successful at dealing with challenging circumstances. I lived in Germany a long time ago. It has stayed with me that things are well organized in Germany, but that blind panic quickly breaks out when things do not go as they should: "So was gibt's maar nicht, das kann maar nicht sein, eine Unverschämtheity."The Dutch compensate for their slightly less organizational talent with a greater ability to improvise. However, I fear that business confidence in our country will also weaken in the coming months.

US labor market continues to be tight
According to the so-called JOLTS (Job Openings and Labor Turnover Survey) report, the US labor market tightened again in February. Although the number of vacancies fell by 17.000, this is within the margin of error of a total of more than 11 million. As the number of unemployed fell more rapidly, the number of vacancies per 100 unemployed rose from 173 in January to 180 in February. In December, the absolute record was set with 181.

It is no wonder that wage growth is accelerating sharply in such a tight labor market. The labor market is also tight for us. According to the CBS, we have 105 vacancies per 100 unemployed (although the CBS previously reported higher figures before a revision of the definition of who is unemployed). The labor market is tightest in the province of Utrecht (130 vacancies per 100 unemployed) and in Groningen the widest (78 vacancies per 100 unemployed).

The following chart shows wage growth in the US and ours. Now these series are probably not really comparable. In any case, the movement is similar. ECB President Lagarde constantly claims that the economic situation in the eurozone is so different from the US that it is justified that the ECB does not or hardly tighten monetary policy for the time being, while the Fed has already raised interest rates in the US and the to raise interest rates further in the coming months. The Dutch economy may then resemble that in the US more than that in the rest of the eurozone. US monetary policy would therefore be much more appropriate for our economy than the policy of the ECB. Strictly speaking, the monetary policy of the ECB which is too loose for our economy should be compensated through fiscal policy. The probability of that happening is 'zero'.

The big story of this week is the sharp rise in inflation in our country, stronger than elsewhere and to an unprecedented high level. The tax cut on April 1 and the VAT cut on energy on July 1 may put some pressure on inflation figures, but the pace of price increases remains phenomenal. That erodes purchasing power. Families can only absorb inflation in their spending by eating into savings. That remains to be seen.

Apart from interventions in excise duties and VAT, inflation will remain high for the foreseeable future if energy prices do not fall quickly. The lockdowns in China threaten to exacerbate logistical disruptions around the world, which are also responsible for soaring inflation, negating the slight improvement seen in recent months. This may give inflation a further boost.

With optimistic entrepreneurs, very high inflation and a very tight labor market, the Dutch economy currently resembles the American economy more than the economy in the rest of the eurozone. The Fed's monetary policy would therefore be more appropriate for us than the ECB's policy. Strictly speaking, our monetary policy that is much too loose for us should be compensated for by a restrictive fiscal policy. By pointing this out, I am a voice crying in the wilderness.

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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