Don't be fooled by falling inflation

Our inflation was 3,0% in August, clearly lower than July's 4,6%. However, this was mainly due to the 'base effect'. In August last year, prices rose by 2,0% in one month. That 2,0%, of course, fell out of the year-over-year inflation rate. In September and October there is again a significant base effect, because last year prices rose in those months by 2,4% and 1,1% respectively. If nothing crazy happens, our inflation rate will fall sharply over the next two months. In October we could even record a slightly negative figure.

Still, that all seems better than it is. Because in August this year, prices still rose by approximately 0,4% month-on-month. If such an increase continues for twelve months, the inflation rate will still be around 5%. We should also realize that a strong negative base effect awaits in November. In November last year, prices fell by as much as 3% month-on-month. This was, of course, due to the enormous fluctuation in energy prices.

In the eurozone as a whole, inflation in August was unchanged from July: 5,3%. Core inflation did fall slightly, from 5,5% in July to 5,3% in August. This means that core inflation remains uncomfortably high and the ECB will undoubtedly raise interest rates a little further.

Everyone has to eat, so there is a lot of attention to food prices. Food prices follow world market prices and energy prices, albeit with significant lags. The following picture shows that food price inflation has now fallen considerably, but that prices have risen in almost every month so far. Fortunately, that monthly increase is now minor and I expect that food prices will actually fall somewhat in the foreseeable future. This is already happening for some products. For example, the milk price has been falling for several months.

The industry has been under pressure everywhere for some time. This has various causes. Rising interest rates and high energy prices are two of them. In addition, the recovery in China is very disappointing. Above all, the industry is suffering from destocking. Significant logistical disruptions arose in the pandemic, which led to enormous supply problems. Entrepreneurs then decided to stock up on materials whenever they could. Because the delivery problems are now over, large stocks are no longer necessary. In addition, maintaining large stocks has become expensive due to the rise in interest rates. Moreover, the prices of many raw materials are under pressure, so entrepreneurs with large stocks run considerable price risks.

When companies use up inventories, they produce less than they sell. If all companies do this at the same time, a downward spiral will ensue. You can see that in data on business confidence and purchasing managers' indices. The CBS business confidence index fell from +0,1 in July to -2,2 in August, the lowest figure since November 2020. This is in line with actual output figures, which show a sharp year-on-year contraction. shows. The NEVI index, which reflects purchasing managers' judgment, fell below 50 for the twelfth consecutive month in August, suggesting continued contraction in the industry. One bright spot is perhaps that the NEVI index improved slightly: from 45,3 in July to 45,9 in August. That was the second consecutive month in which the index rose slightly. The details suggest that it won't be long before the destocking process is completed.

For the time being we do not see any positive developments in the ports. The container index of RWI/ISL, which measures container throughput in the ports of Hamburg, Bremen/Bremerhaven, Rotterdam, Antwerp, Zeebrugge and Le Havre, fell by 2,6% in July compared to June and was therefore 7,2% lower than a year earlier.

Container traffic on the Pacific Ocean is also not growing. The next picture shows the development of the number of containers arriving at the port of Long Beach, on the American West Coast. That is still firmly in the minus.

Bright spots in Asia
There are also a few bright spots to be found, although they are scarce and their light is not yet strong. China's two industrial business confidence indices improved in August. China's CBS benchmark improved from 49,3 in July to 49,7 in August. S&P Global's, also known as the Caixin index, even crept above 50. From 49,2 in July, it went to 51,0 in August.

Another bright spot is the Korean trade figures for August. Although the export value was 8,4% lower than a year earlier, that was better than expected and certainly much better than the -16,4% recorded in July. Caution is advised when interpreting these figures, as they are volatile.

Eurozone credit and money growth are a cause for concern
Earlier this week, the ECB published data on lending and money growth for the month of July. We are not very happy about that. The next two pictures show why. The outstanding volume of credit was still slightly higher than in July last year, but the rate of growth has fallen very sharply recently.

Money growth in the eurozone is also falling. In fact, the so-called money aggregate M1 has been shrinking for some time and not so economically. We have not seen such a contraction since the introduction of the euro. M1 includes the physical money in our wallets, but especially the money on demand bank balances. In the past, M1 growth has often proved to be a fairly good predictor of short-term business cycles. Hopefully it's different this time.

The US economy is showing strikingly contradictory signals. Economic growth is strong. Although the figure for the second quarter has been revised downwards, it is certainly decent at 2% annualised. Growth in the third quarter looks set to exceed that of the second quarter by a large margin.

Nevertheless, the US labor market now seems to be relaxing. The so-called JOLTS report (Job Openings and Labor Turnover Survey) shows that the number of vacancies is currently falling rapidly. In July, 8,8 million vacancies were counted. In June it was still 9,2 million and in December 2022 11,2 million. In July there were 5,8 million unemployed. The number of people resigning themselves (the 'quits') is also falling. I think the figures confirm my suspicion that many companies have vacancies that they do not want to fill at all, unless a good candidate comes forward. You could say that the tight labor market has led to a certain 'inflation' in the number of vacancies. That will also depress wage growth and is actually exactly what the Federal Reserve wants.

The sharp rise in interest rates, and with it mortgage rates, has put pressure on the US housing market. Just like with us. House prices are now rising again from one month to the next, as the last picture shows. If prices continue to rise, I believe that means that interest rates are not high enough to cool the economy sufficiently. In that case, achieving the inflation target may also become difficult.

Interest rates higher?
Our inflation fell sharply in August. This decline will continue in September and October. However, don't be fooled. This decrease is largely due to the base effect. In November, the base effect works very hard in the other direction. Inflation is far from over.

The industry has been struggling for a long time. It looks like the inventory depletion process is almost complete. When the inventory cycle is running, this can give a boost to activity in the short term. In container transport in Europe and the Pacific, no improvements are yet visible, but with some good will, some bright spots can be seen in China and Korea.

The growth of the outstanding bank lending volume in the Eurozone has slowed considerably recently. That's not a good sign. Nor is a good sign that the M1 money supply is shrinking rapidly.

US macroeconomic data paints a confusing picture. Economic growth in the current quarter is considerably higher than in previous quarters. Still, the labor market is relaxing. House prices have risen again in recent months. I have the disturbing idea that rising house prices imply that interest rates will have to rise even further.

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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