Inflation and growth: an unpredictable dynamic

For the time being, the ECB is sticking to the plan outlined in March. Gradually reduce bond purchases first. They will be stopped in the third quarter of 2022. And then there may be interest rate hikes, but exactly when remains unclear. I find that very laconic. In my view, the ECB is taking the risk that inflation will spread further than desired through the economy. The ECB is now also lagging far behind other central banks that have already started monetary tightening.

Now I have to admit that there is some justification for the ECB to lag behind. Hopefully the next two pictures will make that clear. The first picture shows inflation in the US and the Eurozone. In the US, it rose to 8,5% in March. Eurozone inflation stood at 7,5% in March, not much lower than US inflation.

A different picture emerges when looking at core inflation. It amounted to 6,5% in March in the US and 'only' 3,0% in the eurozone, as the following picture shows. Core inflation does not take into account the rise in food and energy prices and the European measure also excludes alcohol and tobacco.

The significant difference between core inflation in both economies indicates that the inflation process has spread further through the US economy than through the European one. As a result, the ECB can adopt a slightly more wait-and-see attitude than, for example, the Fed. But yes, you can also say: look at the slight panic at the Fed and you would like to prevent that, so do something now. We know it takes time for monetary policy to be fully effective. You should not wait until it is too late with monetary policy. Central bankers are paid to estimate future developments and formulate policy now.

US inflation will fall, but not back to 2% anytime soon
By the way, I want to repeat what I have already written several times. It is an illusion to think that US inflation will fall to 2% in the foreseeable future. It may well be that inflation in the US is now close to or even at its peak, but the desired 2% is quite far in the future. The reason for this lies in the housing market. House prices in the US have risen sharply lately, just like in the United States. The rental market works very differently in the US than here. We have a large social sector and the government has restricted rent increases. Tension in the rental market then manifests itself in shortages instead of rent increases. But in the US, rents are following house prices, albeit with a delay. Actual rents paid and rents imputed to homeowners have a weight of more than 31% in the American inflation basket (more than 22%). As the following chart shows, the rise in imputed rents to homeowners in the US is now 4,5% (with us 0,7%). Actual rents were 4,4% higher in March than a year ago. I think rent increases in the US will continue to rise for the time being. Naturally, the rise in interest rates will dampen house prices and with it the rise in rents after some time, but that takes time.

From calm with a period of low inflation to bubbly
The following picture invites you to briefly discuss the dynamics of the current inflation process in the US. The picture shows the price development of three completely different spending categories. In 2019 – and before that too – the picture was quite stable. Inflation was low and the prices of these spending categories were not far out of line. Then the corona time starts and the relative peace is rudely disturbed. Travel is limited and the lower demand for air travel and overnight stays in hotels, motels and B&Bs is pushing their prices down. The demand for cars is increasing, because people suddenly have more money to spend on goods because they can spend less on services. They may also prefer not to use public transport. Car makers are having problems with their production due to chip shortages. The result is a sharp rise in the price of used cars. It is inevitable that the inflation of used cars will moderate and eventually prices may even fall again, but that is not the case for the time being.

In the course of last year, life became somewhat freer and the demand for overnight stays increased again. Prices before that have recovered and the chart shows that prices have continued to rise and are now well above pre-pandemic levels. Air traffic has not yet returned to pre-pandemic levels. However, the price of airline tickets is now on the rise. In March alone, the price of airline tickets rose by 9,7% compared to February and by more than 23% compared to March 2021, but flying is still slightly cheaper than before the pandemic

My conclusion is that the inflation process in the US is far from settled. It bubbles on all sides. During the time of low inflation, there were also limited changes in relative prices. This is important, because it is those changes in relative prices that play a crucial, guiding role in our market economy. Now that inflation is high, those relative prices are shooting in all directions. That disrupts the economy.

Air traffic recovers, but is below 2019 level
That flying is still slightly cheaper (according to US price statistics) than before the pandemic is consistent with the level of air traffic. The following picture shows that although the number of flights per day is currently clearly higher than in 2020 and 2021, it is still lagging behind the numbers of 2019.

Schiphol's figures paint the same picture. In fact, it seems that the number of flights via Schiphol is still a bit further behind in 2019 than is the case worldwide. Part of this may be due to the low number of Asian tourists. I don't miss anything about that, but for the tourist industry it is undoubtedly a loss. Those few Chinese tourists you see at Schiphol these days are often still wearing those weird white paper(?) jumpsuits…

Incidentally, Schiphol's figures also suggest that the occupancy rate of aircraft is currently clearly lower than before the pandemic.

New decrease in shipped sea containers
It seems that the influence of the war in Europe is beginning to show itself in the statistics. The following picture gives an impression of the number of sea containers shipped around the world. That dropped in February. In northwestern Europe, the decline was very sharp. The war started a few days before the end of February, so the decline in February may have been due to other factors. The Chinese New Year disrupts the numbers every year and now the lockdowns in China are on top of that. The March figures will provide more clarity. But then again, there may be other sources of uncertainty.

Number of bankruptcies in our country beyond the bottom
The Chamber of Commerce previously issued a message that a large number of companies are about to collapse. A number of 200.000 even appeared in a newspaper headline. The last picture of this week shows the number of bankruptcies of 'companies and institutions'. The number of bankruptcies was already remarkably low before the pandemic, and during the pandemic that number continued to fall, contrary to initial expectations. We see the same in other countries, but perhaps not as clearly as with us. In the meantime, the number of bankruptcies is no longer decreasing. A slight increase is apparent now that government support measures have ended. On top of that, the war, the sanctions and the increased raw material prices. It is very likely that the number of bankruptcies will increase considerably in the coming period. That is very annoying for those involved, but it gives the market economy dynamism. Hopefully those involved can make a new start soon.

Using my carpenter's eye and using the back of a cigar box, I estimate that we've had an 'under-mortality' of companies in recent years of somewhere between 8.000 and 16.000. A considerable number of these will undoubtedly fall over. No one knows how fast that will go. I wouldn't be surprised if the number of companies that go bankrupt every month will gradually increase from just over a hundred to about five hundred in the coming period.

Inflation in the US has continued to rise and I don't think it's likely that the figure there will fall to 2% any time soon. The rise in rents alone is far too strong for that. Those who take the trouble to delve into the details of the inflation report will find that not only has inflation risen sharply, the differences between the spending categories have also increased sharply. That makes everything very unpredictable in my opinion.

The ECB is pretending that the inflation outlook for the eurozone is very different from elsewhere. There is certainly some difference, but whether that justifies waiting so long with monetary tightening I doubt.

Aviation is recovering worldwide, but activity is still considerably lower than in 2019.

World trade has made an impressive recovery from the corona recession. But in February, the number of sea containers shipped fell remarkably sharply. Whether that was caused by the Chinese New Year, by Chinese lockdowns or by the war in Europe and the related sanctions, is not clear. The figures for March may shed more light on this.

The number of bankruptcies in our country is starting to rise. This trend will undoubtedly continue now that government support has ended and the effects of the war have started to take hold.

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.