Inflation likely to fall further in 2026

Statistics Netherlands (CBS) has released the details of our inflation figures for November. We already knew it was 2,9%, compared to 3,1% in October. I've been wondering about some of the details for a while now. Take beef prices, for example. They've been rising so dramatically for some time now that my daughter has decided not to put beef on her wedding menu. Moreover, in the Netherlands, prices are rising much faster than in neighboring countries (the wedding is in Ireland, by the way, where the price increase is somewhere between that in the Netherlands on the one hand and Germany and Belgium on the other).

In November, the price increase did slow down somewhat: 27,2% year-on-year compared to 32,9% in October.

The price of gasoline also surprises me. It refuses to drop, despite the fact that the oil price in euros is much lower than earlier this year. The following picture illustrates my frustration and that of many motorists. The reason seems to be a gasoline shortage in Europe due to the disappearance of Russian suppliers.

I also closely monitor hairdressers' rates. Not for vanity, but because I'm a nerd who enjoys looking at the details. The services hairdressers provide are very labor-intensive. So you'll probably quickly see the impact of wage increases. That was shocking in November. The price increase accelerated from 3,3% to 4,8% for women's hairdressers and 5,0% for men's and children's hairdressers.

Fortunately, there are also things that are becoming cheaper in absolute terms, such as white goods.

Where is our inflation headed now? I prefer to approach this question from the perspective of food, energy, industrial goods, and services. Food makes up approximately 15% of the inflation basket. The price increase for food (excluding beverages and tobacco) slowed from 3,6% in October to 2,8% in November. Our food prices track global market prices (in euros) with a significant lag, although the relationship is certainly not one-to-one. The following chart suggests that the rise in our food prices will moderate in the coming period.

In November, energy (including motor fuels) was 0,9% more expensive than a year earlier. In October, this was still +2,1%. This component makes up over 5% of the inflation basket. A significant oil surplus is expected on the global market next year. It seems to me that oil prices will then fall even further. The ever-increasing availability of gas will hopefully continue to put pressure on the gas price. The downward trend in energy costs will therefore likely continue next year, despite the shortages on the European gasoline market, thus gradually contributing to lower inflation. The increase in the gasoline excise duty by 5,5 cents on January 1st and 3,6 cents for diesel works in the opposite direction. Since I sometimes experiment with AI, I asked ChatGPT to quantify the effect this has on our inflation. I could have calculated it myself. ChatGPT had to think about it for a relatively long time and scoured a large number of websites. I don't know how much energy that cost. Ultimately, ChatGPT stated that the excise duty increase will add 0,0648-0,0629 percentage points to our inflation. That's the direct effect. There will be an additional effect, as the higher fuel prices will feed through to other prices. Incidentally, ChatGPT also stated that different CO2 pricing will have an upward effect on inflation, but that effect would be very small.

Industrial goods make up about 25% of the inflation basket. Price increases there are already very low or even negative, as we saw with white goods. In November, prices for this category were 0,5% higher than a year earlier. In October, it was 0,4%. I don't expect this picture to change much.

Services, finally, account for roughly half of the inflation basket. Price increases there decreased from 4,3% in October to 4,1% in November. Many services are labor-intensive and therefore respond to wage increases. According to the AWVN, wages in newly concluded collective labor agreements have risen by 3,9% this year. This is less than in the two previous years, but still significantly higher than before the pandemic. It is therefore not surprising that the AWVN, along with VNO-NCW and MKB-Nederland, is advocating for wage moderation. Whether this call is heeded will depend in part on the bargaining power of the unions in a time of labor shortages.

On balance, I think our inflation will moderate. Continued high wage increases and the VAT increase on hotel accommodations, etc. (from 9% to 21%) pose a risk.

German industry appears to be stabilizing. The volume of orders received increased by 1,5% in October compared to September, when a 2% month-on-month increase was already recorded. Production has also increased for two consecutive months: +1,8% in October after 1,1% month-on-month in September. In a year-on-year comparison, this is still far from impressive. The following chart also shows that production in energy-intensive industry is far from buoyant, despite European energy prices having fallen significantly over the course of this year.

China's export value (in USD) was 5,9% higher in July than a year earlier. This was better than expected and also significantly better than the -1,1% drop in October. Exports to the US continue to decline sharply: -28,6% year-on-year. Chinese exports to the EU, on the other hand, were 14,8% higher than a year earlier. Trump's trade war is clearly affecting Chinese exports to the US, but has little or no effect on total Chinese exports. Apparently, the Chinese are succeeding in shifting their exports to other regions. It's possible that Chinese goods will then still find their way to the US via other countries. Another factor is that exports to the US represent only about 10% of total Chinese exports.

The US central bank has lowered its policy rate by 0,25 percentage points for the third time in a row. This wasn't without some resistance. Three members of the policy committee voted against, nine voted in favor. It was the third time this century that three members voted against. Two of them didn't want to lower the rate at all, while the third member who voted against actually wanted a 0,5 percentage point cut.

The explanatory notes were slightly revised. The new text suggests that the interest rate will remain unchanged in January. Further documentation reveals significant disagreement within the Fed about where interest rates will go next year. Several members predicted no rate cuts at all in 2026, a few others think the rate will be cut three or four times, and one committee member even anticipates six cuts.

It must be said, the situation is difficult. Inflation is still too high, and uncertainty remains about the effects of import duties on inflation. This argues for leaving interest rates unchanged for the time being. On the other hand, the labor market is weakening, which argues for interest rate cuts. Don't forget that the government shutdown has halted the flow of information about the economy.

There are two more comments from Fed Chairman Powell about the economic data. First, he said that the figures released in the coming period might still be distorted by the shutdown. Furthermore, and even more striking in my opinion, was his remark that the monthly labor market figures systematically overestimate job growth. Since April, the average monthly job growth has been around 40.000. But Powell thinks it's actually closer to a loss of 20.000 per month. It was the first time I'd heard Powell say that.

On balance, I think the weakness in the labor market will lead the Fed to cut rates further over the next year.

Closing
Our inflation fell further in November. I expect inflation to gradually decline further next year. Continued high wage increases pose a risk.

The latest figures on the German economy are quite positive, but the structural problems persist.

The Fed has lowered its policy rate again. Despite internal disagreements and uncertainty due to a lack of data caused by the government shutdown, further rate cuts are expected over the next year.

Today, former ASML CEO Peter Wennink published his report on how we can boost our earning capacity to meet all the challenges that lie ahead. The report contains a great deal of veiled criticism. This weekend, I will shed some light on this report, which contains a great deal of veiled criticism, in a separate piece. On Monday, I will shed some light on that report in a separate piece.

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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