Inflation prospects remain uncertain

Dutch inflation fell to 2,7% in April. In March it was 3,1%. Still, the April figure was disappointing. Month-on-month, prices rose 0,6%. In the first four months of the year, the price level rose by 2,3%. Please note that these are figures that have not been seasonally adjusted and inflation in our country is disproportionately high in the first months of the year. However, before the pandemic, the increase in the general price level in the first four months of the year was usually significantly lower than this year.

Statistics Netherlands discloses few details in the 'quick estimate'. What is striking is that the pace of price increases in 'food, beverages and tobacco' accelerated from 2,8% in March to 3,2% in April. Food price inflation was actually on a very consistent and long decline. Hopefully the increase in April will be nothing more than a 'bump'. The decline in food price inflation continued as usual among our southern neighbors.

What is also striking is that inflation in services fell sharply: 4,0% in April compared to 4,6% in March. That is good news because services inflation has proven to be the highest and most persistent. This is not surprising, because services are labor intensive and wage growth has slowed in responding to inflation. Inflation in services is therefore more sensitive to wage increases than inflation in other sectors.

According to figures from Statistics Netherlands, the average gross hourly wage increased by 2023% in 7,0 compared to 2022, well above the inflation of 3,8% and also quite well above the 5,9% increase in collective labor agreements. However, wage increases are now moderating. According to provisional figures from employers' association AWVN, the average wage increase in the collective labor agreements concluded in April this year was 'only' 4,51% (on an annual basis). In October last year this was still 8,05%.

In the eurozone as a whole, inflation remained constant in April at 2,4%. Core inflation fell from 2,9% in March to 2,7% in April. These figures will strengthen the ECB's belief that interest rates can be cut at the next policy meeting (6 June).

The Fed is actually on a different track. The policy committee of the US central bank left the official interest rate unchanged this week, as expected, and Chairman Powell also made it clear that an interest rate cut is not an option for the time being. Inflation figures have been disappointing in the last three months, which has not increased the Fed's confidence that things will turn out well. This week it emerged that wage cost increases accelerated slightly in the first quarter. According to the 'Employment Cost Index', wages and salaries increased by 1,1% compared to the fourth quarter of last year and by 4,3% compared to the first quarter of 2023. This is clearly above the level that would be consistent with the inflation target of 2%.

The American labor market is now relaxing. The number of vacancies has been declining for some time and the ratio between vacancies and unemployed people is also declining. In March there were still 132 vacancies per 100 unemployed people. Historically, this remains a high level, but it is clearly lower than the approximately 200 measured at the beginning of 2022.

In his press conference, Powell emphasized that it is unlikely that the Fed will raise interest rates further. Interest rate cuts are therefore coming, albeit somewhat later than previously expected. Powell talked about “paths” that will lead to different outcomes. According to him, two paths lead to interest rate cuts. The first path is a scenario in which the Fed will still have sufficient confidence in the near future that achieving the inflation target is within reach. According to Powell, interest rate cuts are also in view if the labor market were to deteriorate significantly. I thought that was a striking comment because the prevailing narrative is that the labor market is strong. Most figures also confirm this. However, there are some cracks in that story. As already indicated, the number of vacancies has been decreasing for some time. Furthermore, while overall employment is increasing, the number of full-time jobs has been declining for some time and more and more people, especially those on lower incomes, say in surveys that they are afraid of losing their jobs

Eurozone growth stronger than expected in Q1
The eurozone economy grew again in the first quarter of this year: +0,3% quarter-on-quarter. It seems that the Mediterranean countries are currently achieving higher growth than the countries in the north. For example, the Spanish economy grew by 0,7% quarter-on-quarter and 2,4% year-on-year. I suspect that the stronger growth in the south has to do with the rapid developments in tourism. In the pandemic, economies that are relatively heavily dependent on tourism were hit hard as tourism largely came to a standstill. Now this is of course normalizing and there may also be a case of serving 'pent-up demand'.

The confidence of entrepreneurs in Dutch industry increased again in April according to the NEVI purchasing managers index. For the first time in almost two years, the index rose above 50, which indicates that the sector is growing again. Purchasing managers indices elsewhere improved, especially in the services sector (which is not available for our country), while those for industry in other countries fell slightly in April. The Netherlands therefore distinguishes itself in a positive sense. Hopefully it will remain that way, but it would be even better if the mood among entrepreneurs in the industry would also improve in other countries. And I expect that. Moreover, the index of producer confidence in the industry as determined by CBS is not yet on its way up. The NEVI survey is much more extensive than that of Statistics Netherlands. Maybe that gives a truer picture.

Last week, the German research institutions RWI and ISL reported on container transhipment in ports worldwide. I see that as the pulse of the physical economy. Not much changed for the world as a whole, but container throughput in the largest seaports in Germany, the Netherlands, Belgium and France increased sharply in March. In the explanatory memorandum, RWI and ISL write that the unrest in the Red Sea has led to many ships sailing around and therefore arriving later, in March. The measured number of containers may therefore give a flattering picture in March. That will undoubtedly be the case. But if that is the whole story, the figures for January and February should have been proportionately much weaker. That was easy. I am therefore hopeful that the March figure also partly implies a more fundamental improvement and that the negative trend that started in 2021 is now being reversed.

Closing
While inflation in the eurozone as a whole was stable at 2,4% in April, our inflation actually fell slightly. Still, the figure disappointed me. I maintain that the fight against inflation is not over yet. That will certainly not stop the ECB from cutting interest rates at the next policy meeting on June 6. That is the first step in a process. Of greater importance is what that process will look like. Will the ECB cut interest rates rapidly after June 6 or will it maintain a more moderate pace? I suspect the latter.

Inflation in the US has been higher than expected for several months. This does not give the Fed confidence that it will be appropriate to cut interest rates any time soon. Here too I say that the fight against inflation is not yet over.

Fortunately, the economic situation in the eurozone is improving somewhat. On balance, purchasing managers are becoming more optimistic and eurozone GDP grew slightly in the first quarter. With 0,4% growth compared to the previous quarter, the eurozone was not far behind the 0,4% growth recorded in the US.

Container throughput in ports in Northwest Europe increased significantly in March. That figure was undoubtedly flattered by the fact that some boats that were supposed to arrive earlier from Asia had to detour due to the unrest in the Red Sea. But if you take the figures for the first three months of the year together, the downward trend that started a few years ago seems to be broken.

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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