Forget the pandemic puppy, here’s the inflation chicken. That was the headline enter an article The New York Times from the beginning of this month. The ‘Covid dogs’ were unstoppable during the pandemic: good for the walk during the lockdowns, and good against social isolation. The chicken is also such a remedy: why pay squint for eggs, if you can also have them laid in your own backyard? And so many Americans then decide to buy their own chickens – but then so-called heavy layers – species with a large egg production.
Americans are already mentioning the huge increase in egg prices eggflation.
The trend also applies to the Netherlands and the rest of Europe. Here the price level of the egg has already surpassed that of the chicken. If you look in the shelves of your supermarket, you will see that the supply of animal-friendly eggs is shrinking somewhat, and the space for the cheaper free-range egg is increasing. Many customers are, hopefully temporarily, giving up on the more expensive organic egg. The supermarket adjusts its offer accordingly.
Does the ‘eivation’ also say something about the wider economy? It may seem counterintuitive, but the cost of living has been falling, if you look from month to month, for some time now. They reached a peak in October: life that month, all in all, was 12.5 percent more expensive than at the end of 2021. Since October, the general price level in the Netherlands has fallen by just under 4 percent up to January.
Life is now just as expensive as in August last year. But it is quite expensive. Energy, initially the main driver of inflation, has fallen in price by a quarter since August. The price of gas in particular has returned to the level of the end of 2021, and that was months before the Russian invasion of Ukraine – which will have its lurid lustrum next week on February 24.
Foods have continued to rise steadily in price. Food is now one of the remaining drivers of inflation. And because food is a very visible spending category, the general public may be left with the impression that inflation is not fading away at all, but remains persistent.
This impression is correct, for other reasons. While broad-based inflation, measured as the average year-on-year price increase, is declining from a peak of 14.5 percent in September last year to 7.6 percent last month, another important measure continues to rise. That is ‘core inflation’, which excludes volatile energy and food prices. Core inflation continues to rise and reached 6.4 percent in January. And that is the highest percentage since the third quarter of 1980.
Last January, when inflation had already started to rise above 6 percent under the influence of the rising gas price, core inflation was only 2.4 percent. That was reassuring at the time: if the price increases are apparently concentrated around one cause – energy – everything seems to be under control. It is one of the reasons why the European Central Bank reacted relatively late, only in July, by raising interest rates to curb inflation. Everything seemed to be under control at first. Inflation was known as ‘transitory’, of a transient nature.
A year later, things are very different. You can’t just get rid of a core inflation of 6.4 percent. But the confusion surrounding inflation may be even greater than it was a year ago. Just a month ago, investors were celebrating, believing that inflation would start falling again on its own. That would mean: just a few more small interest rate moves up by the big central banks and the job was done. The admonition from Washington and Frankfurt that the fight against inflation was not yet over was not or hardly listened to. The interest on the ten-year Dutch government bond fell to 2.2 percent, a sign of diminishing inflation fears. In the case of Germany, the difference between interest rates on ordinary government bonds and those on inflation-protected government bonds, which reflects what average inflation investors expect in the coming years, narrowed from 2.5 percent in August to just 2 percent.
But since then, inflation expectations have risen again, and the interest on ten-year Dutch government bonds has risen to 2.8 percent. Economists are in the dark: Nobel laureate Paul Krugman last week discussed the theory of the “immaculate fall in inflation” (immaculate disinflation): a fall in inflation that, contrary to theory, occurs while the labor market is still historically tight.
American economist Jason Furman, meanwhile, came up with a ‘super-core inflation’ – excluding energy, food, housing costs and second-hand cars, which, calculated on a three-month basis and then projected on an annual basis, shows a sharp fall to just 1.8 percent. You can call that genius, but just as well consider it as torturing the price data until they really tell you everything you want to hear.
How it goes on? This week, the financial markets completed their intellectual turn. Until recently, futures contracts on US money market interest rates indicated that investors expected the Federal Reserve, the US central bank, to start cutting interest rates as early as the second half of the year, because the inflation problem is fading away. But now the markets are not so sure anymore, expecting no, or much less, cuts over the course of the year. Inflation appears to be stickier than expected. Let’s just hope that the pandemic puppy and the inflation chicken will soon get along in the backyard.
#high #inflation #longer