Don't panic about our Dutch inflation

The CBS will publish the details of the inflation figure for November on Tuesday. In the 'quick estimate' of a week and a half ago, inflation appeared to have increased from 3,5% in October to 4,0% in November. That was an unpleasant surprise for many. Our inflation is among the highest in the eurozone and that acceleration does not look good. I would say: Don't panic, guys!

Our inflation is currently being driven up by two factors: the increase in tobacco excise duty and the rent increase. The increase in tobacco excise duty was responsible for approximately 0,6 percentage points of the inflation of 3,5% in October (the November figures will be released on Tuesday). If you don't smoke, you won't be affected by this. The rent increase was responsible for approximately 1% of the total inflation. A homeowner won't be affected by this.

With regard to the acceleration of the inflation rate in November, it should be said that this is mainly a base effect. Our inflation figures are not adjusted for seasonal influences. November is traditionally a month in which prices fall or at least rise little. This year, the price index fell by 0,6% month-on-month. But last year the fall was greater at 1,0%. In the first graph, I have shown the month-on-month change in the total price index in November for a series of years. In 2022 and 2023, the index fell exceptionally sharply in November. But those were outliers. In 2024, the price index fell a lot less, but historically that -0,6% is not bad.

The inflation figure for December is difficult to predict. The 'prices at the pump' are rising. But a base effect is unclear. The following graph shows that the price level in December fell steadily month-on-month until more than ten years ago. But that has changed in recent years. Last year, prices rose very slightly in December: 0,04%. If that turns out to be slightly higher this year, the year-on-year inflation rate will increase somewhat further from the 4,0% in November. On the other hand, if the pattern of more than ten years ago recovers, the inflation figure will fall. I dare not bet money on it. However, I do expect inflation to fall back considerably in the first half of next year, mainly due to base effects.

Tears in my eyes
We know it by now. Industry is struggling everywhere, but especially in Europe. Purchasing managers in industry in the three largest euro countries are not at all optimistic. The PMIs for industry in Germany, France and Italy were 43,0, 43,1 and 44,5 respectively in November. We are doing slightly better with 46,6. The problems are well known. We have too little innovation, are reasonably strong in 'old sectors', but not in the fast-growing sectors. And our strong old sectors are currently experiencing cutthroat competition from China. In addition, we have too much regulation and the energy prices here are 'killing'. The latter is only getting worse. European gas prices have doubled since the low point in February. They are almost five times as high as the American ones.

In this way, there really is no need for protectionist policies from Donald Trump to seriously damage European industry. It brings tears to my eyes. What is happening here is what is so strikingly said in English a train wreck in slow motion hot. My impression is that most people don't even realize what this will mean in the long run. And those who do see what is happening, stand by and watch. It's maddening. For my own health, I better not get too worked up about it.

Germany takes the crown. In October, production in the manufacturing industry there was 4,7% lower than a year earlier. Compared to the peak in 2017/18, the loss of production is now around 17%. The level is, apart from the deep recession of 2009 and the pandemic, the lowest in around eighteen years. Yes, reports are being written, plans are being made, speeches are being given and meetings are being held, but the real sense of urgency is missing. Unbelievable! Very worrying!

When the need is greatest, help is near. Let us hope so. The Germans are going to the polls in February. In the campaign, the main parties seem to be preparing a fundamental change in economic policy. The excessively frugal budgetary policy may be thrown overboard. We will see.

How different is it in the US? Admittedly, the industry there is also not growing or hardly growing, but there is at least no question of a major contraction. Where the purchasing managers' indices in the three largest euro countries are around 43-44, the US is on the books at 49,7. Not great either, but considerably better than ours.

The US job market is apparently improving. In October, the number of job openings and the number of quits (number of people who voluntarily quit their jobs) is on the rise again. The Fed's Beige Book also had a much better tone than three months earlier. At that time, a majority of the twelve Fed districts reported a decline in economic activity, now there was a very large majority where an increase in activity was recorded. Fed Chairman Jay Powell confirmed the stronger economic momentum when he was questioned during a meeting in New York this week. His conclusion was that the Fed can be 'patient' with further interest rate cuts. There currently seems to be no need to support the economy with interest rate cuts and inflation is still slightly above target. At the same time, the policy rate is higher than 'neutral' and that is no longer necessary. The Fed has therefore stated that it is on its way to 'neutral'. Where exactly that is, is not known, but the Fed will determine it empirically. In my opinion, that means that the Fed will cut the rate again by 0,25 percentage points in a week and a half.

The ECB is in a greater hurry. A discussion is now developing there about how far the policy rate should be lowered. Some 'doves' are already arguing that the rate should be lowered to below 'neutral'. Bundesbank President Joachim Nagel is countering this and is arguing that lowering it to neutral will be sufficient. There have been times when the 'hawks' advocated a less flexible policy. And to be honest, I can see the storm coming. The 'doves' are simply going to win this. Because not only is the weak economy important, the problems surrounding the high national debt in some euro countries also play an important role.

Closing
Inflation in the Netherlands has accelerated from 3,5% in October to 4,0% in November. Don't panic, this is mainly a base effect. In the first half of 2025, inflation will gradually decrease.

Industry is under pressure and I don't see how especially European industry will be able to recover in the short term. Hopefully I am too pessimistic. Perhaps the policy in Germany will be fundamentally changed after the elections in February. But that will take some time. Things are going better in the US. The labour market there even seems to be getting stronger.

I expect the Fed to continue to cut rates gradually. The ECB will be more hasty and I fear that we are heading for extremely low interest rates in Europe, especially in terms of the ECB policy rate. Hopefully not as low as before the pandemic, but I am worried.

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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