Dutch inflation remarkably persistent

Inflation in our country fell slightly in August compared to July: 3,6% against 3,7%. The pattern and level of Dutch inflation this year differs considerably from several other countries where inflation figures have been published in recent days. In Germany and France, inflation fell from 2,3% in July to 1,9% in August. In Belgium, inflation fell from 3,7% to 2,9% and in Spain from 2,8% to 2,2%. For the eurozone as a whole, 2,2% is now on the books in August compared to 2,6% in July. Core inflation in the eurozone fell from 2,9% in July to 2,8% in August.

It is not immediately clear why our inflation picture is less favourable than elsewhere. It may be due to specific factors such as tax and excise duty increases and especially the rent increase that has been much higher this year than in previous years. Another explanation is that our labour market is tighter than elsewhere, which means that wage increases are higher here.

It is common to look at the month-on-month or year-on-year development of the general price level in the context of inflation. A somewhat different way is to look at how much prices have risen since the beginning of the year and then compare the different years with each other. If you do that, you come to the disconcerting conclusion that 2024 up to and including August is the second worst year in recent times. The first graph shows that only in 2022 did prices rise faster up to and including August than this year. For core inflation, it is probably even worse. Although Statistics Netherlands has not yet published these figures, I conclude on the basis of calculations on a cigar box that core inflation from the beginning of the year up to and including August has been the same or even slightly higher than in 2022, the peak year for inflation.

The outlook for the rest of the year is not encouraging. In September last year, the general price level fell by 0,4%. It would not take much to push the September inflation figure (year-on-year) above 4%. And if things go really badly, we could even see a figure above 5% in November, partly due to a base effect. But perhaps things will turn out better than expected. Even then, we should not count on a decline in the inflation figure. In wage negotiations, these high inflation figures will be taken into account and, due to the shortage of labour, wage increases will remain substantial. This creates a self-perpetuating mechanism.

If the ECB were only looking at the Netherlands, it would certainly not implement a quick interest rate hike. But the ECB is looking at the eurozone as a whole and it seems highly likely to me that the ECB will cut interest rates again in two weeks by 0,25 percentage points. Joachim Nagel, the president of the Bundesbank, is still struggling a bit, but that is part of it. He has a few supporters, but these 'hawks' are not numerous enough to prevent an interest rate cut.

Producers slightly more optimistic in August
According to the CBS standard, Dutch industrial entrepreneurs have become slightly more optimistic in August. It was already known that consumer confidence had actually fallen slightly. Although this is a comparison of apples and oranges and the scale on the vertical axis differs, the following picture suggests that consumer confidence has been very low for a while from a historical perspective and also lower than you would expect based on producer confidence. Perhaps the high inflation of recent years also plays an important role here.

The 'Economic Sentiment' index, which the European Commission compiles every month, improved slightly in August. The index is based on an extensive survey among entrepreneurs in various sectors and also consumers. My last graph this week shows that it is not all that great yet. Confidence has been more or less stable in recent months at a level that is slightly below the long-term average. This implies that the eurozone economy is experiencing modest growth. Although I have serious doubts about the growth potential of the European economy, I think that a number of important factors will ensure that the growth rate continues and perhaps even increases slightly in the short term. The improvement in purchasing power is the most important of these. This will enable consumers to increase their spending. This is partly due to lower energy prices, which also help industry. Furthermore, the recovery in world trade will enable an improvement in export performance.

Closing
Our inflation is remarkably persistent and the outlook for the rest of the year is bleak. It would be going too far to say that I would take a poison bet on it, but it seems to me almost certain that we will see significantly higher inflation figures for the rest of the year than the 3,6% we saw in August. It is not often noted, but the increase in the price level from the beginning of the year to August is higher this year than in any other year in the last forty years or so, with 2022 being the only exception.

Inflation in the rest of the eurozone is approaching the 2% target. I would be very surprised if the ECB did not cut rates again in September.

The Dutch and European economy remains relatively weak. There is moderate growth and that picture will not change much in the coming period. Some acceleration of growth is still the most obvious.

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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