Food inflation appears to be peaking

Things are not going so well in the Dutch retail sector. In March, turnover was only 4,1% higher than a year earlier. However, that includes inflation. Turnover was 7,0% lower in volume. In February, nominal sales were still up 8,0% year-on-year. The volume was then 3,3% lower than a year earlier.

Meanwhile, inflation at the industrial level continues to decline at a rapid pace. Manufacturing output prices fell by 0,8% in March compared to February, when prices also fell by 0,5%. Compared to March last year, prices were still 1,9% higher, compared to 8,3% higher in February. As with consumer prices, the fall is mainly driven by energy prices. In contrast to the level of consumer prices, the increase in food prices in the manufacturing industry has been weakening for months. In July, a peak of +23,2% was reached compared to a year earlier. That has now dropped to 12,1%. It strengthens my belief that food inflation at the consumer level will decrease in the near future.

Some euro countries have already published inflation figures for April. In France, as well as in Belgium and Spain, food inflation finally fell slightly in April. Inflation did rise slightly in France, while in our southern neighbors there was a decline, even in core inflation. It was the first drop in Belgian core inflation since September 2021. In Spain, just like in France, inflation rose, although this was mainly due to base effects and core inflation actually fell. Next Tuesday, Statistics Netherlands will publish the provisional inflation figures for April for our country.

The first picture shows that inflation at the producer level (PPI) is somewhat ahead of that at the consumer level (CPI). As the PPI continues to fall sharply, the CPI is very likely to fall further in the coming months. In the months of April, May and June, this fall will be disappointing due to base effects, a slight increase cannot even be ruled out. But in July to September it will drop sharply due to base effects, if energy prices do not throw a spanner in the works.

The government wants to spend €28 billion on climate policy, of which €10 billion in 2024. This mainly concerns subsidies. An advisory group of civil servants had also recommended all kinds of tax increases, but the government has not (yet) opted for that. I think it's a difficult discussion. The needs in many areas are great and government finances are not very prosperous. Anyone who wonders on social media whether it is wise to spend so much money for subsidies in the context of climate policy will be told in response that the costs will be much higher if we do nothing. Our Minister of Finance writes in a tweet that we 'keep the earth livable with these plans'. Our influence on global CO2-emissions, however, are not measurable. It is therefore impossible to determine to what extent our policy to combat climate change achieves that goal.

Eurozone escapes recession, but growth is less than expected
According to preliminary figures, the eurozone economy grew by 0,1% in the first quarter. That was less than expected, but at least there was no contraction. In Spain and Italy, growth exceeded expectations, while in France and Germany the figure was disappointing. The German economy even stagnated while the figure for the fourth quarter 2022 was also revised downwards.

US growth is somewhat disappointing
The US economy grew 1,1% in the first quarter (annualized; in our terms, growth was 0,3%) compared to the last quarter last year. That was lower than expected, but that setback was mainly caused by companies making heavy use of inventories. This phenomenon made a negative growth contribution of 2,3%. Since companies cannot continue to use their stocks, this is temporary. In addition to inventories, investments in housing also contracted, while companies invested less in means of transport.

Other than that, the numbers actually looked pretty good. Private consumption grew by 3,7% quarter-on-quarter annualized and foreign trade on balance made a small positive contribution to growth.

Still, I think there are still challenges ahead for the US economy. Business investment, for example, is not strong at all. In March, orders for capital goods (excluding defense and aircraft) fell 0,4% from February, when they also fell 0,7%. While it was up 2,0% year-on-year, it was the slowest growth since December 2020. And remember, these are nominal numbers. Although there is no 'volume variant' of this series, there are some measures that reflect the price development of capital goods. The chart below shows that the value of orders has skyrocketed after the pandemic. But it can also be seen that little or nothing remains of that increase when the price increases are deducted from it (deflated with the PPI Private Capital Equipment). Also remember that these are figures from before the turmoil in the banking world. Undoubtedly, due to this turmoil, banks have further tightened their lending conditions, which may have further curbed investment.

The US debt ceiling
Republican leader of the House of Representatives Kevin McCarthy has successfully pushed a bill through the House to raise the federal debt ceiling. The plan includes cuts that the Biden administration will have to make in exchange for that increase. The bill passed the House by a vote of 217 to 215. (The Republicans have 222 seats, the Democrats 213). Four Republicans voted against, saying the cuts didn't go far enough.

McCarthy's plan will certainly fail in the Senate, where the Democrats have the majority. Negotiations will then have to take place that will hopefully lead to an agreement that will eventually also be given his blessing by President Biden. None of that will be easy, because the Republican plan makes it impossible to implement Biden's budget and he has no good word for the Republican austerity proposals.

It looks like the government will hit the debt ceiling as early as early June. If the ceiling is not raised by then, some government services will close and all kinds of expenses cannot be made. Americans may not be able to meet their debt obligations. This could lead to a great deal of unrest in the financial markets.

McCarthy are demanding cuts of $130 billion in the next fiscal year, which begins Oct. 1. That is about 2% of the expenditures made by the federal government in the last twelve months.

The planned increase in the debt ceiling is $1.500 billion. That is not that much and it would mean that the government will hit the ceiling again in March next year. That is spicy because then the 'primaries' for the November elections are in full swing. The following graph shows that the budget deficit has risen sharply in recent months. Over the last four quarters, the deficit has amounted to 7% of GDP, which is quite a lot.

German business confidence improves further in April
In April, the German Ifo index, which measures business confidence, improved further. It was the sixth month in a row that the index rose, but it was the smallest increase of those six months. The chart shows that expectations fell sharply last year, but that they have recovered sharply. Incidentally, the sub-index which reflects the assessment of the current situation fell.

Economy chugs along
The economy in Europe and the US is buoyant. There is still growth, but it is not impressive. I am quite concerned about the debate surrounding the US debt ceiling and the prospects for corporate investment in that country.

On this side of the Atlantic, food price inflation appears to be close to or just past its peak. On Tuesday, Statistics Netherlands will publish provisional inflation figures for April. In other euro countries that have already published their April figures, it appears that food price inflation has finally eased somewhat in that month. That's good news, but one swallow doesn't make a summer.

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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