At 4.4 percent, inflation is significantly lower than it was a month ago. Without wanting to spoil the party right away, macroeconomist Arnoud Boot has a few comments on this fine figure. “Inflation is almost always persistent because it enters the capillaries of the entire economy”.
Inflation is awful. Some people get very rich from it, others are hit hard by it,’ Boot explains. ‘Large companies can raise prices due to high inflation and take advantage of the situation. But it also applies to citizens that one can have an easy life and the other falls between two stools. Just look at the effect of inflation on rents. Apart from energy costs.’
Good news
And there, in energy costs, is the good news for Boot. Those prices fell sharply, and this explains “one hundred percent the low inflation rate.” But core inflation, excluding volatility in energy and food prices, is still around eight per cent. And this is the real effect on the economy.
If energy prices continue to fall, as expected, and food prices also decline in the coming months, inflation could soon hit zero, Boot says. And maybe even negatively. But that’s out of the question for core inflation.”
If food and energy prices remain low, Boot believes this will eventually have an effect on the economy and thus core inflation as well. “But we know historically that once inflation is out of the bottle, it’s hard to put it back in.”
According to Boot, inflation is persistent by definition. ‘It is almost always persistent because it enters the capillaries of the whole economy. In wages, in services and goods and in supermarkets’, explains the macroeconomist. “I know of no episode in history, unless it was an accidental coincidence, where inflation easily disappeared.”
Read | Inflation in the Netherlands fell sharply to 4.4% in March.
Interest rates continue to rise
This means that central banks will continue to raise interest rates, despite the current decline in inflation. It is now at three percent in Europe and, according to Boot, will “no doubt” gradually go to 3.5 percent. “They have to, because these are not relatively large percentages yet.”
Even the ECB, the European Central Bank, must hurry, he thinks. “Otherwise you will end up in a situation with almost permanently high inflation and therefore the interest rate will have to rise above the inflation rate. Think about it.’
As paradoxical as it sounds, the economy works “like a charm,” says Boot. ‘The way consumers spend money makes trees seem to grow to the sky. I’ve never seen him like this before.’ As a result, however, the consumer puts unimaginable pressure on the economy, and that pressure creates, so to speak, inflation.
Challenges
As for Boot, there are several challenges, both at the central bank level and at the government level. Boot: ‘Politicians don’t want rates raised, on the other hand they have to ensure that public spending stays within limits. But the government should actually invest more,’ he says.
“We have often seen that in difficult times the government cuts the easy things like government investment.”
“However, we’ve often seen that in tough times, the government cuts the easy stuff like those government investments,” Boot points out. “In an economy where we have a permanent shortage of staff, investments need to be made.”
Banks
At the same time, Boot sees that European banks are better regulated than in the past. ‘Let’s not pretend interest rate hikes are bad for banks, they park our savings at the central bank and receive three per cent interest on them, while we receive only half per cent interest on our savings. There is a subsidy from the banking sector of 2.5%. The banking sector is simply supported.’
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
