Record inflation is mainly due to energy prices

Record inflation is mainly due to energy prices

You can call it impressive, spectacular or shocking. The Netherlands had an inflation rate of 5.6 percent in November compared to a year earlier, according to the so-called HICP index, which you can use to compare inflation between European countries. This first (provisional) figure, released by Statistics Netherlands on Tuesday, is the highest ever since Statistics Netherlands began measuring HICP in 1997.

For the Netherlands, a different inflation index is more often used, the consumer price index (CPI). This includes the costs of living in owner-occupied homes, unlike the HICP, which does not include these costs. Within Europe, there has been haggling for years about how exactly the price of living in one’s own home should be measured in the HICP.

Definition difference

Statistics Netherlands considers the CPI to be a better indicator of inflation in the Netherlands than the HICP. Statistics Netherlands will publish the CPI figure for November next Tuesday. It is this figure that is used for, among other things, the indexation of wages and benefits.

Peter Hein van Mulligen, chief economist at CBS, expects a lower CPI figure. “Whether this will exceed 5 percent is still uncertain,” he says on the phone. Within the CPI, the costs of living in one’s own home have a considerable weight (about 16 percent), and these costs have barely increased (0.7 percent). “This will depress the CPI against the HICP.” However, a CPI figure of 5 percent or more would also be spectacular. This was last recorded in 1982.

HICP inflation in the Netherlands was higher than the eurozone average, which stood at 4.9 percent in November, statistical agency Eurostat announced on Tuesday. Just like the figure for the Netherlands, this is a record. In Germany (6 percent) and Belgium (7 percent) inflation was even higher than in the Netherlands.

Expensive energy

How does inflation get so high? Mainly because of the increased energy prices. Energy was 42.7 percent more expensive in the Netherlands in November than a year earlier, in the eurozone 27.4 percent more expensive. Last year around this time, energy prices were very low.

‘Core inflation’, which excludes the often volatile energy and food prices, was 2.6 percent in both the Netherlands and the eurozone. This is also very significant compared to the past months and years – mainly due to the shortages of all kinds of products. These shortages drive up prices. They were caused by supply problems caused by the pandemic and are further fueled by strong consumer demand, who have a lot of money in their pockets due to, among other things, the recovery policies of governments.

The European Central Bank (ECB) aims for an inflation rate of 2 percent, measured over a period of about three years. For the time being, the central bank in Frankfurt sees no reason to adjust monetary policy – ​​characterized by ultra-low interest rates. An interest rate hike could curb inflation. At a higher interest rate, borrowing becomes more expensive for consumers and saving becomes more attractive. That depresses consumption – and ultimately prices. But according to the ECB, inflation is transitory. Energy prices will fall again next year and product shortages will disappear, it is expected in Frankfurt, where the ECB is based.

Also read: Central banks are surprised by ever-rising prices, and are hesitant to intervene

Show at ECB

Nevertheless, a change of tone can be observed in the last few days in Frankfurt. “There is a risk that inflation will not go down as quickly as we have predicted,” ECB executive Luís de Guindos said in an interview with the French business newspaper on Tuesday. Les Echos. His colleague Isabel Schnabel spoke last week of “upward-sloping inflation risks” – meaning the same as De Guindos.

The uncertainty surrounding the Omikron variant of the coronavirus is difficult for central bankers, including those in the United States. An upturn in the pandemic could hurt the economy through new lockdowns and other restrictions. Then an interest rate hike – which has a negative effect on the economy – is risky. But ‘Omikron’ could also drive inflation further, Jerome Powell, the head of the US Federal Reserve, said during a hearing in the US Senate on Tuesday. Restrictive measures in (industrial) production and transport could further exacerbate product shortages, Powell said. He estimates the latter risk to be higher. Powell announced that he wants to start phasing out the Fed’s low-rate policy faster than planned.

Record inflation is mainly due to energy prices
Source link Record inflation is mainly due to energy prices

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