Inflation record, now down again

It was hard to swallow again when it was announced this week how high inflation has risen. However, a fall in the oil price and a cautious recovery of the euro are signs that the worst inflationary pain is behind us.

It's exciting every time you open the newspaper or open a news website. How fast is purchasing power declining again? On Wednesday it was hard to swallow again, with the news that inflation in August amounted to 13,6% according to CBS. This unofficially shatters the record of 11,1% from January 1975. Not yet official, as the inflation figure based on the Dutch consumer price index will only be announced in the course of next week. Klaas Knot, as chairman of De Nederlandsche Bank (DNB), threw some more fuel on the fire by warning that inflation will remain high for a while. Fortunately, there are also more and more signals lately that life is not becoming completely unaffordable.

Natural gas? Oil!
For example, it is a favorable sign that the oil price has started to slide considerably in recent weeks. At the end of August, a barrel of Brent oil cost just under $95 a barrel. After the first week of March, it was still over $120. Although the tightness in the natural gas market through higher energy prices is now receiving all the attention, oil is feeding through in inflation figures in significantly more ways. It is mainly a result of the expensive oil that the output prices of Dutch industry were higher in July 28 than twelve months previously. But compared to a month earlier, for the first time in almost two years, there was a small decrease. On futures exchanges, traders are pricing the oil price to fall below $90 over the course of next year.

Hooray: savings interest is rising
Another sign that we have probably reached the inflation peak is that people like Knot see the danger of high inflation. The European Central Bank (ECB) looks set to raise interest rates again by 50 or maybe even 75 basis points in September. Higher interest rates slow down economic growth. Among other things, it will become more attractive for people to save and more difficult for companies to borrow money for new investments. If there is less demand for products and services, prices will rise less quickly. Another advantage of a rapidly rising European interest rate is that it becomes more attractive to hold assets in euros rather than in other currencies.

Clear signal from capital market
Thanks to a more decisive attitude of the ECB, the free fall of the euro against the dollar has at least temporarily come to a halt. Since Tuesday, the European currency is even worth slightly more than the American one. However, the main signal that inflation is going to fall comes from the bond world. There, the interest rate for Dutch loans with a ten-year term is still well below the 2% level. Investors would never settle for that rate if they thought inflation would hover around 10% for a long time. Although it remains to be seen whether the tone will then be more cheerful, it must be strange if the high inflation in twelve months' time is still fully in the spotlight.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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