This is a column by BNR’s in-house economist, Han de Jong.
Inflation is the difference between the price level at one point in time and a year earlier. If you face the fact that you don’t know exactly how things are going to play out with the price level, you can at least use what you know. You just have to look at the statistics and you will find out how the price level has developed from month to month over the past year. That’s half the battle. The “basic effects” are easy to draw.
“Because of ‘base effects’, we can expect a spectacular drop in inflation in the coming months”
Those who do it for the Netherlands will immediately see that we can expect a spectacular drop in inflation in the coming months. In the four months from July to October last year, prices rose by no less than 7.7%. Unless the price of gas explodes again, it won’t happen again this year. What does this mean for our inflation? Will you count?
It could be below freezing in October
The starting point is official inflation for June: 5.7 per cent. In the first six months of this year, the price level has risen on average by just over 0.2% per month each month. If that average continues over the next four months, inflation will be -1.0% in October! And to exactly meet the ECB’s 2% target, the price level could rise by more than 1.0% per month over the next four months.
Of course, fuel prices just shot up again, but I think there’s a good chance that inflation will be close to 0% in October. I’m curious as to how the tone of social debate will develop when this spectacular decline unfolds. And what influence will the mysterious disappearance of inflation have on collective bargaining?
‘What effect will the mysterious disappearance of inflation have on collective bargaining?’
Incidentally, inflation will rise sharply in November because the price level fell sharply in November last year, but other than that. One issue that will need to be addressed is whether inflation is exceeded when the figure reaches or falls below the ECB’s target. Such a conclusion would be premature.
Disinflation driven by temporary factors
With inflation picking up since mid-2021, many economists believed the rise in inflation would be temporary. This turned out to be incorrect. At the risk of making the same mistake, I would now say, on the contrary, that the decline in inflation as we have seen it for months and will see it again in the coming months is largely driven by temporary factors. Energy prices will not continue to fall.
There is a lot of hype about food price inflation because it hits everyone every day and households with the lowest incomes are the hardest hit. Profit margins on food products have increased, but food price inflation is mainly driven by international agricultural prices and energy prices, albeit with significant lags. Based on these two, food price inflation can be expected to moderate in the coming months. But eventually this too will end.
Eurozone inflation has been less volatile than ours over the past year and a half. Currently, the two are not far apart. Inflation in the eurozone is also expected to be much lower in October than it is now, but not as much as ours. I estimate the inflation rate in the Eurozone will be between 2% and 3% in October. I’m very curious if there will be pressure on the ECB to lower interest rates and how it will deal with that pressure. Especially when unemployment is rising everywhere. That will be the moment of truth.