Eurozone inflation below target for first time in three years

According to preliminary figures from Eurostat, inflation in the eurozone has fallen below 2% for the first time in more than three years. In August, inflation was still 2,2%, in September it fell to 1,8%. This was mainly due to energy prices, which took a considerable dive. Services inflation also fell slightly: 4,0% in September compared to 4,1% in August. Core inflation is still well above 2%. In September it was 2,7%, slightly lower than the 2,8% in August.

Looking at the figures for the major eurozone countries, I get a sense of déjà vu. In Germany, France, Italy and Spain, inflation (HICP measure) in September was 1,8%, 1,5%, 0,8% and 1,7%, respectively. Hopefully this is not a harbinger of inflation that will be chronically below the ECB's target, in which case the ECB will see reason to lower the official interest rate to absurdly low levels again. Because energy prices fell sharply in the last quarter of last year, it is obvious that inflation figures will actually rise again in the coming months. Energy prices fell sharply in November last year in particular.

Food inflation accelerates
In our own country, inflation is considerably higher than the eurozone average. According to the CBS benchmark, it was 3,5% in September compared to 3,6% in August. This means that the overall price level fell by 0,5% in September compared to August, slightly more than the month-on-month decline in September last year, which was 0,4%. In our country too, lower energy prices were the main cause. And in our country too, services inflation fell fractionally. Food price inflation accelerated and inflation in industrial goods also rose.

On the European inflation measure, the HICP, our inflation came to 3,3%, unchanged compared to August. Of all the euro countries, only Belgium had a higher figure: 4,5%. On the national Belgian inflation measure, inflation in our southern neighbours was 'only' 3,06%. It is fairly clear why our inflation is higher than elsewhere. Rents, which have a weight of around 20% in the inflation basket, rose by 5,5% in July, the strongest increase in 30 years. In our country, rent increases are heavily regulated. The annual rent increase that applies to many homes is subject to a maximum. That maximum was always linked to inflation. When inflation caught us by surprise and towered far above wage increases, the maximum rent increase was linked to wage increases.

Rent increase linked to wage increase
That is now breaking us, since the wage increase is now well above inflation. Moreover, many homeowners have sought the maximum this year, because the actual rent increase is only slightly lower than the maximum. In 2025, the maximum rent increase will still be linked to the wage increase. That also means that rents will keep inflation high in 2025. It is conceivable that the government will intervene and link the maximum rent increase to inflation again in 2025. If the rent increase next July is clearly lower than this year, then inflation in the second half of that year will be much lower than it is now. We will see.

Peter Hein van Mulligen, chief economist of the CBS, reported on BNR that our inflation excluding rents would have been 2,5% in September, also well above the average of the eurozone. The increase in tobacco excise duty earlier this year also keeps our inflation high. And I also get the impression that our wage increase is higher than elsewhere and that that also plays a role. Now that the FNV has made a wage demand of 7% plus a four-day working week with retention of pay, it does not look like our wage increase will decrease any time soon. Apparently the strike funds are well filled and there is a great willingness to take action.

NEVI purchasing managers index slightly up
The purchasing managers index among industrial companies published by NEVI improved slightly in September. In July and August the index had fallen and ended up below 50. In September there was a small improvement: 48,2 compared to 47,7 in August. Since the index is still below 50 you have to conclude that things are not going great.

World trade improves slightly
World trade seems to be picking up somewhat. The German institutions RWI and ISL monitor the transhipment in a large number of ports worldwide. They calculated that in August 1,7% more containers were transhipped worldwide than in July. Compared to a year earlier, the increase was even 8,4%, although it should be said that these figures are volatile. North-western Europe played a fair part: month-on-month the increase was 2,2%, year-on-year 9,4%. That is very welcome because Europe had previously lagged considerably. China was also able to present convincing figures: 2,2% month-on-month and 8,9% year-on-year.

Closing
Due to other urgent work, I will keep it short this week. European inflation has fallen below 2%. Although core inflation is still above that, it will strengthen the ECB in the idea that they were right to start cutting interest rates a few months ago. Inflation in the four largest euro countries has now fallen very clearly below 2%. Base effects will probably cause inflation to rise in the coming months, but let's hope that we do not end up in a situation again with inflation that is structurally well below the ECB's target. That could be a reason for the ECB to make significant interest rate cuts to the ridiculous levels of before the pandemic. That does not seem healthy to me. Incidentally, we are not there yet.

Our inflation is well above the eurozone average and will remain so for a somewhat longer period. Dutch purchasing managers have become somewhat less gloomy in September. However, they are not yet downright positive and optimistic. Container handling in ports worldwide has clearly increased in August. Hopefully that is a sign of an increase in world trade. While the ports in northwestern Europe previously lagged far behind ports elsewhere in the world, they now contributed more than proportionally. That is a welcome development

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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