That persistent inflation in the Netherlands

The CBS reported last week that our inflation in February had risen to 3,8%, from 3,3% in January. This time, energy was not the cause. Food, with a weight of 11% in the inflation basket, but with a considerably higher weight in the daily shopping basket, became 1,1% more expensive in one month. This is not unusual for the month of February, but because the price increase of food was lower than normal in February last year, food price inflation accelerated from 3,1% in January to 3,8% in February. So there is definitely a 'base effect' at play here.

Our food prices are of course partly determined by local factors, but world market prices also play a role. The first figure shows the correlation of our food prices with the food price index (in euros) of the FAO (Food and Agricultural Organisation of the UN). The best correlation is found when our food price inflation is delayed by nine months. The graph suggests that the rate of increase of our food prices will probably increase further in the coming months, although we should be cautious because of the base effects mentioned.

Meat was a major culprit in February. Meat prices were 6,1% higher in February than in February last year. The graph below shows that the price of meat has been increasing at an increasing rate since the middle of last year. De Telegraaf reported earlier this week that this was partly due to the decrease in livestock. But there is also an acceleration of inflation in 'bread and grains'.

A strong correlation with world market prices occurs for coffee and tea, although supermarkets find that suppliers increase prices more than world market prices. Be that as it may, prices for coffee and tea shoot up, by 16,5% and 9,3% year-on-year, respectively. For 'milk, cheese and eggs' the price increase is much more moderate, although this is mainly due to falling prices for eggs.

Milk prices are rising. Butter is made from milk, so the correlation between the prices of both is high. I'm no expert, but the correlation coefficient is higher when the milk price is lagged by a month. That suggests that milk prices follow butter prices, while I would expect the opposite. Anyway, butter was 19,5% more expensive in February than a year earlier. Do the math! Or your loss.

The influence of the strong wage increase is starting to wane somewhat. The prices of labor-intensive services, such as hairdressing, are still rising, but that price increase is leveling off. In the following graph I do wonder why inflation for men's hairdressers should be higher than for women's hairdressers.

Car insurance, finally, continues to become considerably more expensive. I don't know exactly why, but it will probably have to do with both the sharp increase in wages, which makes repairs more expensive, and the higher prices for cars and car parts.

Speaking of inflation, Russian inflation rose to 10,0% in February, the highest level in two years. While some may question the numbers, rising inflation is a sign of increasing stress in the Russian economy. High inflation is a threat to social and political stability, especially in countries like Russia. Hopefully, the regime will feel the pressure to end the war soon. The two vertical lines in the following graph indicate Russia’s annexation of Crimea in 2014 and the start of the war in 2022.

In the US, inflation actually fell back in February. Prices rose 0,2% month-on-month, both in total prices and when excluding food and energy. On a year-on-year basis, headline inflation fell from 3,0% in January to 2,8% in February. Core inflation (excluding food and energy) fell from 3,3% in January to 3,1%. These figures were slightly better than expected and increase the likelihood that the Fed will cut rates further, although one swallow does not make a summer.

The behavior and economic policy of the American president remain extremely volatile. This increases uncertainty and makes companies more cautious. Confidence among SMEs had risen sharply after Trump's election, but the decline in the NFIB index that started in January continued in February. Judging by the absolute level, SMEs remain hopeful, but the madness has to stop soon. There is already talk of a recession. Last week I showed a chart showing that recent figures suggest that the American economy is shrinking in the first quarter. This is largely due to the increase in imports to avoid the import tariffs. But if the second quarter also results in a contraction, a recession is a fact if one follows the rule of thumb of contraction in two consecutive quarters. I haven't checked, but that must be a record. I suspect that no American president has succeeded in pushing the economy into a recession so quickly.

Closing
Dutch inflation rose across a broad front in February. The impact of wage increases seems to be waning somewhat, but food price inflation in particular is rising and world market prices suggest that this process could continue for some time.

Inflation is also rising in Russia, a sign of growing problems in the economy.

US inflation in February was actually somewhat lower than expected. But confidence among SMEs has deteriorated, which is not surprising given the growing uncertainty caused by the president's volatile behavior.

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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