Finance

Inflation to highest point of the century, will prices rise further?

First and foremost, this is a provisional figure intended for the European statistical office Eurostat. It uses the figure to calculate the European average inflation rate, called the Harmonized index of consumer prices (HICP).

Because the statistical offices of member states all have their own way of calculating inflation, the HICP figure differs from the Dutch inflation figure, which will be announced next week. The biggest difference is that the costs for owning a home are not included in the European figure.

Last in May

Provisional or not: in November inflation came out at 5.6 percent according to this calculation method. In an ideal situation, prices would rise by about 2 percent: that is exactly a nice balance between healthy growth of the economy, without life becoming more expensive too quickly.

Very low or no inflation is also not good, as households and companies with debts can get into trouble.

Today’s figure is the highest since Statistics Netherlands updated the HICP figure. Inflation last came close in 2001, in May of that year it was life 5.5 percent more expensive.

Disruptions world economy

“Quite exceptional by Dutch standards”, responds Ester Barendregt, chief economist at Rabobank. The main reasons for the high inflation are the disruptions to the economy caused by the corona crisis, as factories shut down and then suddenly had to run at full speed again and high energy prices.

“But international transport has also become more expensive, especially container transport,” continues Barendregt. Shortages of raw materials also cause price increases.

Temporary or long-term?

“That raises questions about how long this will continue: are the high inflation figures temporary or long-term,” said Barendregt. At Rabobank, they think inflation will weaken again in the course of next year.

To keep inflation at the same level as it is now, energy prices will have to keep rising sharply. The bank considers that such a strong increase as last year is unlikely.

She is supported by her colleague at ING, Bert Colijn. “Even though the price at the pump is at an all-time high, to keep inflation steady, prices must continue to rise.”

The high inflation is therefore temporary, Colijn also expects. “In the medium term, and that’s what you ultimately aim for, you expect inflation to fall again.”

Will wages also rise?

Another important reason for this is that wages are barely rising, the two economists agree. High inflation is not only determined by manufacturers who charge high prices for their products, but also the willingness of consumers to pay these prices, explains Barendregt.

“And that can only happen if wages rise. And we don’t see that yet. And we don’t think wages will fully compensate for the price increases,” says the economist. Colijn also does not expect so-called ‘second round effects’. Wage growth is still lagging behind inflation, he notes. Although higher wages are paid to people who are now being hired, he adds.

The two economists do not completely rule out the possibility that prices will continue to rise for a while. The corona crisis is not over yet, certainly not with the arrival of the new variant omikron.

Corona creates uncertainty

Colijn sees it happening again in ports in China and Southeast Asia. This in turn causes disruptions in the supply of products and raw materials and higher transport costs. “You will see that again next year or this year,” says Colijn.

“Inflation risks have increased, uncertainty has increased,” Barendregt agrees. And even when the corona crisis is over, the question is how quickly everything will be back to normal.

In addition, other factors than the corona crisis play a role in the current high prices, says Barendregt. Like the global energy transition. “The demand for gas has increased, but there is no additional supply.”

The high inflation is reason for MP Pieter Omtzigt to put parliamentary questions to outgoing State Secretary Dennis Wiersma. The budget has been based on much lower inflation in 2022 than appears to be the case now, and Omtzigt wants to know what the consequences will be for purchasing power next year.

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