Gas: plus 30.6 percent. Electricity: plus 39.6 percent. Motor fuels: plus 27.3 percent. It is mainly the large increase in energy prices – the percentages are on an annual basis – that is fueling the high inflation in the Netherlands.
Inflation last month reached 3.4 percent from a year earlier – the highest level in nearly two decades, Statistics Netherlands reported Thursday. The last time the currency devaluation rose this high was in April 2002. In September the inflation rate was still 2.7 percent. The price increase of gas and electricity was also the culprit that month.
It takes some getting used to for many people: a period with clearly rising prices. You notice it in transport, among other things. The price of a liter of petrol is around 2 euros. Traveling by train is also becoming more expensive. Tickets for second-class journeys and season tickets with NS will be on average 1.8 percent more expensive next year. The increase is based on “the expected inflation figure”, according to NS last Friday. The company refers to the increased costs it incurs itself, for maintenance, energy and also wages. Those costs are now passed on.
Labour costs
As far as wages are concerned, there are increasing signs that the very tight Dutch labor market is starting to play a role in inflation. The FNV union is demanding a 5 percent wage increase to compensate for rising inflation. Higher wages lead to higher production costs for companies, which can further drive inflation – the so-called wage-price spiral.
Although such a spiral is not yet provable, the scenario is cause for alertness about rising inflation. Energy prices are very volatile and do not necessarily have to affect the general price level for a longer period of time. But if energy inflation lasts longer, it could fuel currency depreciation across a broad front. Especially if other factors are also driving up prices – like now. Because, in addition to energy, there is a second driver of inflation: the worldwide shortages of raw materials, materials, chips. It is a result of the disruptions in supply chains caused by the corona crisis, as well as the huge global demand for products after the lockdowns ended.
Also read: From chips to drivers, from electronics to bicycle parts: there is a worldwide shortage of everything
OECD figure
All these factors play a role not only in the Netherlands, but worldwide. On Thursday, the OECD, the think tank of industrialized countries, announced that inflation in the OECD area (38 countries, including those of the EU, the US and Japan) stood at 4.6 percent in September, compared to 3.4 percent in August. Energy and food prices in particular pushed up inflation. But even without those (unstable) energy and food prices, OECD inflation was high in September: 3.2 percent, the highest level since April 2002.
Central banks around the world are struggling with currency depreciation. The most difficult question for them is whether inflation is transient or permanent. Raising interest rates too quickly runs the risk of nipping the economic recovery in the bud. Waiting too long will give inflation a free rein – and undermine the purchasing power of citizens.
The major central banks, such as the European Central Bank, the Bank of England and the US Federal Reserve, aim for an inflation rate of 2 percent, measured over a longer period of time. They see 2 percent as a healthy buffer against deflation, a downward spiral of price falls that can ruin the economy. In recent years, inflation in the western world has usually been (much) lower. Higher inflation is now tolerated, in the belief that it would be temporary – which no one knows for sure.
Hesitant central banks
On Thursday, the Bank of England unexpectedly canceled an interest rate hike, although the bank expects 5 percent inflation next year. Two of the seven executives of the central bank in London voted against the decision: they did want an increase in the interest rate, which is now 0.1 percent.
The US Fed’s decision on Wednesday to scale back its massive debt purchases was unanimous. The Fed now buys up to 120 billion dollars (104 billion euros) in government bonds and state-backed mortgages every month. This pushes the long-term interest rate down. From December, the Fed will buy 10 billion less in government bonds and 5 billion less in mortgages each month. When the asset purchase program ends – according to this timeline in June 2022 – the Fed can also raise interest rates from just above 0 percent.
The ECB is still the most hesitant. Before a first rate hike, it must first make a decision about the future of its debt-buying programs. The ‘pandemic emergency buyouts’ of just under 80 billion euros per month will expire in March 2022. What remains are the regular purchases of government and corporate debt of 20 billion euros per month.
Behind the scenes, the ECB is now intensively discussing the total amount of purchases after March. A decision on this will be made in December. In the financial markets, the ECB is expected to raise interest rates (now 0 percent) at the end of next year. But if inflation in the eurozone (now 4.1 percent) continues to rise due to a wage-price spiral, the central bank in Frankfurt may feel compelled to intervene more quickly.
Also read: ECB sails risky inflation rate
#Inflation #continues #rise #Whats