Opinion Han de Jong

The inflation is not yet overcome

June 15, 2024 - Han de Jong

It is not easy to be a central banker. Around the turn of the year, the Fed announced that they would start a process of interest rate cuts if the members of the policy committee would gain a little more confidence that inflation is going to be fine. It seemed to be a matter of a few months. Then followed a series of disappointing inflation figures. As a result, that confidence did not increase and interest rate cuts were postponed.

This week, the Fed met again. The published dot plot shows that four members of the policy committee do not expect any more interest rate cuts this year, seven are considering one interest rate cut, and eight are thinking about two interest rate cuts before the end of the year. However, before this was made public and while the Fed was meeting, it turned out that inflation in May was actually lower than expected.

During the press conference, Chairman Powell was asked about how that favorable inflation figure had influenced the discussion and expectations. It was not entirely clear whether the Fed had already seen the inflation figure before their own meeting. Powell was vague about it. He said that some of his colleagues had adjusted their own projections a bit, while others had not.

Quite remarkable reaction
Regardless, financial markets reacted positively to the inflation figure. Bond prices soared, as did stock prices, and the dollar lost ground. I found this reaction quite remarkable because the upside surprise in the inflation figure was only 0.1%. Apparently, markets were craving a bit of good inflation news.

It cannot be denied that it was quite a nice inflation figure in the US. Other inflation measures also show a moderation in the pace of price increases. Powell also expressed satisfaction that the labor market is becoming better balanced, reducing the risk of significant wage increases, although he still considers the labor market strong. It seems a bit like the Fed is somewhat behind the curve. Anyway, if inflation continues to be favorable in the coming months, two interest rate cuts are still on the table for this year.

Current level of interest rates is restrictive
Powell was also asked why the Fed would even lower interest rates now when economic growth is reasonably good and inflation is still above the target, although trending down. The Fed chief replied that the current level of interest rates is restrictive and that the Fed would harm the economy if it maintained that restrictive level for too long. I think he is right.

In our own country, the CBS published the details of inflation in May. We already knew that inflation had remained stable compared to April: 2.7%. A few things caught my attention. Labor-intensive services continue to become more expensive quickly. Rates at hairdressers and beauty salons were 7.4% higher than a year earlier, and repairing household appliances was 9.0% more expensive. Prices in hotels and restaurants have increased by 5.7% in a year. You can also see in the relative price development how the government is trying to steer. Gas was 20.4% more expensive than in May 2023, while electricity was 25.1% cheaper. This should encourage people to switch.

Products whose prices skyrocketed during the pandemic are now becoming cheaper. Furniture prices fell by 3.1% in May compared to April and by 7.1% compared to May of last year.

Premiums for car insurance keeps rising
I am surprised by the premiums for car insurance. They keep rising. In May, another 6.3% was added. Year-on-year, that figure stands at 22.7%. I had noticed that premiums for car insurance had also risen significantly in the US (and possibly elsewhere). While premiums in our country rose again in May, they actually decreased in the US. Hopefully, that is a sign for us…

It does not seem likely that inflation will clearly fall back for the rest of the year. This is due to the pattern from last year. Caution is advised here because the figures have not been adjusted for the season. Between May and December last year, the price level increased by only 0.15% in total. To see the inflation rate drop from 2.7% in May, the price level in the last seven months of the year must increase less than 0.15% in total. That seems like a challenge. In July last year, prices rose by more than 1% month-on-month. Perhaps the inflation rate will decrease a bit then, but a setback awaits us in November.

Curious about the inflation figure in July
By the way, I am very curious about the inflation figure in July. That is the month when rents are increased. The maximum rent increase for social housing this year is 5.8% and for other housing 5.1%. Last year, it was 3.1% and 4.1%. According to the CBS, rents increased by 2.0% back then. Rents are important because actual rents and imputed rents to homeowners together account for about 20% in the inflation basket.

The economic situation in our country seems to be cautiously improving. Production in the manufacturing industry increased by 0.4% in April compared to March, although the level was still 3.5% lower than last year. Exports also improved in April. The volume of our goods exports was 2.3% higher than a year earlier. It was the best figure since March 2023. Machines, chemical products, and food and beverages were especially exported more.

Source: Macrobond

Actually, the near future looks quite reasonable. The economy is picking up. A first sign that we are benefiting from a strengthening of global trade can be seen in the export figures for April. Many companies are still drawing on inventories. This hampers growth but is temporary. When inventory depletion gives way to inventory buildup, production growth will receive a boost. Furthermore, there is a clear improvement in purchasing power this year, supporting private consumption.

The most recent US inflation figure was a positive surprise. The financial markets were also in need of that after a series of disappointments. If the upcoming figures also turn out well, the Fed may cut interest rates a bit faster than they currently seem to plan. But let's not celebrate too soon. Inflation is not yet defeated. You can see that in our own inflation figure. At 2.7%, it is clearly above the 2% target set by the ECB for the entire eurozone, and it seems unlikely that our inflation figure will decrease overall in the second half of the year.

Han de Jong

Han de Jong is a former chief economist at ABN Amro and is currently, among other roles, the resident economist at BNR Nieuwsradio in the Netherlands. His commentaries can also be found on
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