Latest inflation figure is a pleasant surprise

Our inflation in January came in somewhat lower than expected: 3,3% compared to 4,1% in December. Month-on-month, the general price level fell by 0,3%. In January last year, it actually rose by 0,5%. The limited amount of details released in the 'rapid estimate' does raise some interesting aspects.

Inflation was suppressed because energy and fuel prices were 1,4% lower in January than a year earlier. In December, they were 1,5% higher. Services inflation also fell sharply: from 5,8% in December to 4,4% in January. It remains to be seen whether this decline will last. On the other hand, inflation for food, beverages and tobacco actually increased from 6,7% in December to 7,0% in January. The latter is not the inflation that we all notice in the supermarket, because the figure is distorted by the sharp increase in tobacco excise duty last year. Nevertheless, the increase suggests that inflation in food is accelerating. That is not good news. In fact, the acceleration of inflation in food has been going on for some time. According to the CBS figures, food prices were 0,3% higher in March last year than a year earlier. That had risen to 2,2% in December. It probably rose further in January, but we will not know that until February 13, when Statistics Netherlands publishes all the figures.

Things aren't looking too good for the consumer. In December, retail sales increased by 1,5% compared to the previous year. In volume terms, the increase was a meagre 0,3%. That's disappointing, because you'd expect the increase in purchasing power to support consumer spending. Now, retail sales are only a part of total consumer spending, but still.

According to NEVI, the confidence of purchasing managers in our country decreased slightly in January. Their index came out at 48,4. In December it was still 48,8. A little less than a year ago, the index briefly rose above 50, but that turned out to be temporary. So here too, not exactly a hosanna mood, although of course it could always be worse.

When I saw the figures for new orders for German industry in December, I became optimistic for a moment. They had risen by 6,9% in one month, although the level was almost 6% lower than a year earlier. My good mood was dented a little when I read that the high growth figure was driven by a 55% increase in orders for 'aircraft, ships and trains'. Without those large but very volatile orders, the increase would have been 2,2% month-on-month. Well, that's still neat, of course. This morning, my positive mood took another hit. Industrial production in Germany fell by 2,4% month-on-month in December. Year-on-year, the production level was more than 3% lower.

Hardly comprehensible
The graph of the index shows a picture that is almost impossible to comprehend. The manufacturing industry produces around 20% less than at the peak at the end of 2017 and the production level is comparable to that of the end of 2006. In eighteen years, German industry has therefore made no progress. The graph also clearly shows that recessions hit hard and that recovery occurs between recessions. Now, the German economy has been in net stagnation for a long time, with industrial production continuing to decline. Are we witnessing the decline of the once mighty and powerful German industry? Can a new government reverse this process?

In the US, the industry is not doing very well either, but it is clearly doing better than in Europe and especially better than in Germany. The ISM index that measures the confidence of industrial entrepreneurs rose from 49,2 in December to 50,9 in January. These entrepreneurs have become more positive about their orders in particular. That is a positive sign.

The number of job openings in the US fell to 7,6 million in December. In November, there were 8,2 million job openings. It goes with ups and downs, but these figures suggest that the US labor market is gradually easing. There were 110 job openings per 100 unemployed in December. The labor market can therefore still be called tight, but not as tight as three years ago when there were about 200 job openings per 100 unemployed. If the relaxation of the labor market continues, the inflationary pressures emanating from the labor market will also continue to diminish.

Closing
Dutch inflation fell more than expected in January. Hopefully, this trend will continue, but that is uncertain. Retail sales are rising, but disappointingly slowly, while the NEVI purchasing managers index remained below 50 again in January.

It could always be worse. In Germany, industrial production continues to decline. The production volume is now equal to that of 2006. Unbelievable.

In the US, things are not going so badly. Industrialists are becoming more optimistic and the labor market is relaxing further, which will hopefully lead to further declines in inflation. With Trump at the helm, the craziest things can happen.

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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