US inflation decline stagnates

The most important economic news this week was the disappointing inflation in the US. In February, consumer prices rose by 0,4% compared to January. Prices excluding food and energy also rose by 0,4%. There are many American (and non-American) economists who analyze these figures in detail in many different ways. I haven't come across any comments that were very optimistic. The message is clear: the decline in inflation is stalling. The first graph shows that core inflation has actually been rising again since the middle of last year. It is also nice to see that the month-on-month increase in core inflation has been higher for months than before the pandemic. The increase in producer prices in February was also significantly higher than expected.

The main culprit in consumer price levels is wage growth. It is simply too high to get inflation to 2% and then keep it there. You can also say that companies are apparently sufficient pricing power to pass on cost increases. The inflation figures give reason to assume that the Fed cannot and will not lower interest rates in the short term. The figures also raise the question of whether the widely praised soft landing, in which inflation falls without a significant increase in unemployment, is a realistic scenario. We will see.

Doubts about the strength of the American labor market
The American economy grew faster than expected last year and this year seems to be going well as well. Last week, job growth in February appeared to have again exceeded expectations. However, there are some comments to be made about this. First, the initially reported job growth numbers last year were subsequently revised downwards in almost all months. Perhaps, therefore, we should not attach too much importance to the initially published data. Moreover, the figures on job growth are flattering because they are mainly part-time jobs. In fact, the following graph shows that while almost three million jobs have been added over the last twelve months, the number of full-time jobs has fallen. The difference between total job growth and that of full-time jobs has been remarkably large in the last year. Moreover, job growth has mainly been achieved in government, especially in education and 'leisure and hospitality'. That's fine, but not a sign of great economic strength.

The following graph suggests that not too much should be expected from SMEs in terms of job creation in the near future. The National Federation of Independent Business (NFIB), an interest group for SMEs, surveys its own members monthly. The confidence index of these companies fell in February while an increase had been expected. The index reached its lowest level since May last year. The sub-index reflecting plans to hire new staff fell sharply, reaching its lowest level since 2017, apart from during the pandemic.

Troubled inflation picture in our own country
We already knew that Dutch inflation fell to 2,6% in February. In January it was still 2,8%. The following images show that the underlying image is still very turbulent. Industrial goods, excluding energy, are currently becoming cheaper. This is not unique, but the recent movement seems to be the opposite of what happened when logistics disruptions around the world pushed prices up. It is quite possible that the prices of these goods will fall a lot further, but the inflationary effect this will have is temporary.

The picture is very different when it comes to prices for services. These continue to rise at a pace that is clearly higher than before the pandemic.

Energy prices have put downward pressure on inflation over the course of last year. That period now seems to have come to an end. When energy prices move violently, they have a significant impact on food prices, albeit with a significant delay. The increase in food prices is now much lower than a while ago. In February they were only 0,3% higher than a year earlier. It is very likely that a negative figure will be recorded in March for the year-on-year price change of food. But that will also ultimately prove to be temporary if energy prices do not fall again. In short, inflation will gradually fall further in the near future, driven by prices for industrial goods and food. Ultimately, however, inflation can only remain low if the price increase of services also decreases. That is certainly not impossible, but it is still too early to celebrate the victory over inflation.

CBS revises industrial production figures
Production in Dutch industry was more than 5% lower in January than a year earlier. That is a significant minus, but last year Statistics Netherlands reported a production drop of as much as 10%-12% in some months. However, CBS has now revised the figures. Every now and then the so-called 'base year' for statistics is shifted. That has now happened. Because the industrial structure of our country has changed significantly over the years, this has a major influence on the figures. The sectors with the strongest production growth have been given greater weight in the calculation of the figures. As a result, the very negative figures published last year have disappeared from the books. Instead of figures around -10%, there are now declines of around 5%. It's not good, but it's less bad.

Closing
The decline in US inflation is stalling. Both consumer and producer price figures were disappointing in February. It reduces the chance of rate cuts by the Fed. At the same time, questions arise about the strength of the American labor market. At first glance, there appears to be very healthy job growth. On closer inspection, the figures are often revised downwards at a later stage and, moreover, the job growth appears to be entirely about part-time jobs, while the number of full-time jobs is declining.

Inflation did fall in our own country in February, but the depressing effect of the price development of industrial goods and energy on the total inflation rate will prove to be temporary. The crux remains wage developments, which have a strong influence on the prices of services.

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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