The Netherlands sees inflation surge to a 40 year high

by Shaun Richards

This morning has seen another stage in the inflation journey. This has over the past 24 hours seen a couple of stages. First came the rumours that the US CPI numbers would be below expectations. Note they they were not saying it would fall but simply be lower than expected. But that has seen something of a counterpoint from the Netherlands already today so let me hand you over to the NL Times.

Inflation rose to 6.4 percent on an annual basis in January. That is the highest level in over 40 years. According to Statistics Netherlands (CBS), which released the figures, higher food and energy prices pushed inflation. In December, inflation was still 5.7 percent, which was also the highest in almost 40 years. In August 1982, prices rose by an average of 5.9 percent year-on-year.

The market narrative of lower inflation is as you can see not going so well and you will not be surprised at the main player.

According to CBS, the gas and electricity bill was almost 90 percent higher in the first month of 2022 than a year earlier. In December, the annual price increase was 75 percent. The contribution of energy to headline inflation amounted to more than 3 percentage points.

Actually the energy category contributed 3.9% in spite of the attempts by the government to ameliorate the price rise.

The government has taken measures to reduce the increase in energy bills. The tax credit on the energy bill was increased, and the tax rate on electricity was lowered. Despite the reduction in energy tax, the annual price increase of energy was higher. According to CBS, this is because variable energy supply rates rose further in January.

This energy issue is a moot point which I will return to in a moment as there are other areas pushing inflation up.

Food was 4.3 percent more expensive in January than a year earlier. In December, it was 2.6 percent. The annual price increase was higher in January than December for almost all types of food. Bread, cheese, and curd made the largest contribution to this development. The price development on clothing and shoes, on the other hand, depressed inflation.

So bad news particularly if you like some bread and cheese which makes me wonder if the price rise for the former is already reflecting higher fertiliser costs? It feels to early which is worrying in that it means more is to come. The more fundamental point is that Dutch workers and consumers are seeing inflation in two vital products namely food and energy or as a central banker would say non-core areas.

The House Price Problem

We also got a confirmation that inflation on the Euro area measure was the 7.6% of the early estimate so it is pulling Euro area inflation higher. The gap of 1.4% is mostly caused by the inclusion of owner occupied housing in the CPI which via the inclusion of imputed rents reduces the number. Believe it or not inflation over the past year in this area is recorded at 0.8%. I say believe it or not because I have yet to meet a home owner who pays themselves rent but I have yet to meet one who has not had to pay for the property.

In December 2021, owner-occupied dwellings (excluding new constructions) were on average 20.4 percent more expensive than one year previously. It is the largest price increase since the start of this statistic in 1995.

It is simply amazing that they think they can get away with recording housing inflation and it was so low I checked it! Anyway the index rose from 112.52 to 113.29 and the crucial point is that it is 15% of the index. So something which is soaring in price is pulling recorded inflation lower.

Putting it another way if we put house prices in the number the Dutch CPI measure would rise from 6.4% to 8.4% ( I have reduced the weight to 10% as they would likely do). Using the same methodology with the Euro area measure would raise it to 8.9%.

I think you can see why they are so keen to avoid this…

The ECB

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The inflation numbers here pose more than a few questions for the ECB and it is getting its response in early.

: Raising rates would not lower energy prices. But if high current inflation threatens to lead to a de-anchoring of inflation expectations, we may still need to respond, as our mandate is to preserve price stability

That was from yesterday’s Ask ECB session on twitter and it is really quite extraordinary as she tries to claim actual inflation does not matter but if it is expected to rise the ECB would respond. Sadly the ECB rarely gets asked how it got the present situation so wrong,

In fact she was pretty desperate to shift the goalposts.

: Our primary goal is to ensure stable prices. We are aiming for an inflation rate of 2% in the medium term. Since its inception, average inflation in the euro area has been 1.7%

Actually the line from Dr. Schnabel is not going well and it is only the next day.

The Commission expects inflation this year will be 3.5%, well above the European Central Bank’s target of 2.0%, and much higher than its own forecast from November of 2.2%. This is also a more pessimistic forecast than that of the ECB from December, when the bank projected inflation at 3.2% this year. ( Yahoo Finance )

As ever though they then predict it will decline.

“Price pressures are likely to remain strong until the summer, after which inflation is projected to decline as growth in energy prices moderates and supply bottlenecks ease. However, uncertainty and risks remain high,” Gentiloni said.

That is convenient because it means they never have to act.

ECB’S REHN: THE EUROPEAN CENTRAL BANK WILL EMPLOY ALL AVAILABLE TOOLS TO KEEP INFLATION AT 2%. ( @BreakingLive_ )

I wonder how they think they can get away with statements like that? Especially in the Netherlands where the inflation rate is 7.6% with their measure and more like 9% if you include housing inflation.

Comment

The story of 2022 is one of inflation and the consequences from it. The clearest is that many countries will have a cost of living crisis of the sort not seen for many decades. Millennials and younger will never have experienced anything like this. What iy is also showing is the failures in the metrics which are supposed to measure this and also in the bodies which are supposed to protect them.

If we start with the metrics then the miss measurement of housing inflation is enough to change the recorded number by something around 1.5%. This is why it is an issue I have concentrated on over the years.

Next comes the failure of the central banks and it is twofold. They were originally given the job to bring inflation down when it was high. The target of 2% per annum has no particular significance other than at the time it was something to aim for. Along the way the central bankers have been allowed to claim that 2% per annum is price stability when it is not and in fact they are being innumerate. Now they have added to it by claiming some elements of inflation – in this instance energy prices – are nothing to do with them at all. They were supposed to help people get better off but in 2022 the results of their past policies will make them worse off as inflation takes its toll.

This is added to by the lying as if we refer to Ollie Rehn above and his “all available tools”. So far the ECB has used none of them….

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