Inflation sows division in society

I am in Portugal, on a workationYesterday the weather was so bad that I stayed inside and pored over the Dutch inflation statistics. I'm ignoring the rest of the global economy. So this is a somewhat unusual one. weekly, more of a themed post. That will be the case next week as well, as it's already in the works.

We already knew that our inflation rate in October was 3,1%, a slight decrease after the 3,3% in September. Statistics Netherlands (CBS) had already reported this in its "rapid estimate." This week, we received all the details. Statistics Netherlands (CBS) wrote in its press release that clothing and gas had suppressed inflation, while airline tickets had the opposite effect. Regarding clothing and airline tickets, it should be noted that price developments are volatile and subject to seasonal influences, which, however, are not the same every year. For airline tickets, a lot depends on when the school holidays fall, and for clothing, the weather plays a role. Therefore, I can't do much with "clothing" and "airline tickets." The inflation-reducing effect of gas is welcome and, in my view, more structural in nature. I suspect that this inflation-reducing effect will continue due to the increasing availability of LNG. This, however, does not alter the fact that the gas price for households in October was 63% higher than in October 2019. This increase is more than twice the increase in the general price level.

I enjoy digging into the details and draw a few conclusions. First, groceries are still rising rapidly. The price of all food combined was 3,6% higher than a year earlier. Food prices have been rising by more than 3% year-on-year all year. People see this every day in their shopping carts. The fact that the price of household appliances is falling (washing machines, dryers, and dishwashers were about 8% cheaper than a year earlier) is good, but how often do you buy them? The prices of labor-intensive services also continue to rise sharply. Driving lessons, for example, were 5,6% more expensive than a year ago.

I also noticed that museum, library, and zoo prices have risen by 6,2% compared to October of last year. When the Schoof government wanted to raise VAT on these establishments from 9% to 21%, the sector was outraged, as any price increase would drive visitors away. The VAT increase didn't go through, but the sector did significantly raise visitor fees.

Coffee is quickly becoming more expensive, tea cheaper
What also struck me is that there's a remarkable divergence in some products. This leads to a very different inflation experience for different groups. Take coffee and tea, for example. For a long time, prices moved in parallel, but recently, coffee has been rapidly increasing in price (+26,2% year-on-year in October), while tea has actually become cheaper (-6,3%). Tea drinkers are better off than coffee drinkers. This is likely largely due to global market prices, although some supermarket chains are resisting the higher coffee prices.

There's also a notable difference in the cost of living between meat eaters and vegetarians. Meat was 10,2% more expensive in October than in October of the previous year, while vegetables were 2,5% cheaper. A vegetarian therefore experiences much lower inflation than a meat eater.

I'm not ashamed of it, but I drink coffee and eat meat. Well, that costs money. Incidentally, we're seeing some remarkable developments with meat, which I've mentioned before. Beef and veal prices are rising exceptionally quickly, by more than 30% year-on-year. In neighboring countries, prices are also rising, but significantly less rapidly, as the following figure shows. I don't know exactly what's going on here. Someone recently suggested that it's due to the nitrogen problem in our country, which means fewer cattle can be raised. I don't know if that's true.

What's also striking is that the prices of pork, poultry, and fish are rising much less rapidly than beef. This will likely lead to changes in purchasing and eating habits. Ultimately, this will also affect the prices of these other meats and fish. Pork is now almost 7% more expensive than a year ago, and poultry almost 6% more expensive. Fish, on the other hand, is slightly cheaper than a year ago.

Car insurance is also rapidly becoming much more expensive. During the pandemic, premiums dropped because we drove less and therefore incurred fewer claims. Now we drive more, and repair costs have risen due to wage increases. Furthermore, I understand that maintenance on an electric car costs less than on a combustion engine car, but repairs are actually more expensive. This is reflected in the cost of car insurance, which is currently over 10% more expensive than a year ago.

In the euro area as a whole, inflation fell from 2,2% in September to 2,1% in October. The difference with Dutch inflation therefore narrowed slightly, but remains persistent.

Closing
Our inflation fell slightly in October, but remains well above the eurozone average. I don't think that will change anytime soon. I find some rather persistent elements in the details of the figures, and I fear that our inflation won't fall towards 2%, the ECB's target for the entire eurozone, anytime soon.

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

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.