“Possibly struggling to control inflation”

``Possibly struggling to control inflation''
EconomyJul 19 ’23 8:01Modified Jul 19 ’23 09:41author: Hans de Jong

If history teaches us anything about hyperinflation, it’s that we must struggle to bring it under control. The more out of control inflation gets, the more stubborn it gets, the more painful it will be to fight.

This is a column written by Han De Jong, home economist at BNR.

Explanatory – prices in the grocery store. ANP/Dutch Height Venema Media (ANP/Venema Media)

Obviously, inflation is completely out of control. Central bankers who initially told us that inflation would be temporary warned some time ago that it was more stubborn than expected. So the logical conclusion seems to be that we will have to struggle a bit to get inflation under control. In the “real” economy, the pain consists of deflation, recession, bankruptcies and, above all, high unemployment, and mainly in financial markets a sharp drop in stock prices.

So far, inflation has been painlessly reduced. Whether this will remain the case is uncertain.

Han De Jong, Home Economist at BNR

how is that possible?

However, we see something completely different. Inflation is coming down like a rocket and will almost certainly hit the central bankers’ target of 2% or even fall below it in the coming months. However, there is no question of economic pain, while investors are certainly not grieving but rather celebrating. AEX is more than 10% higher than it was at the start of the year and NASDAQ is up 40% dirty. how is that possible?

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I see four possible explanations for the recent developments. The first is that the pain he experienced in the past to control high inflation is caused by central banks. They may have gone too far in raising prices. This time they found the narrow and slippery path between doing too little and doing too much perfect. regards.

The second explanation is that the pain has not yet come. The rise in interest rates has not yet been fully realized, and corporate earnings are under increasing pressure. From this point of view, rounds of layoffs and falling stock prices are waiting as a result of lower corporate profits. For now, however, that is not yet the case.

after temp

The third explanation is that the decline in inflation is only temporary. This is due to underlying effects, such as lower energy prices, lower food price inflation and – in the US – lower rent inflation. The underlying picture is less favorable and once the temporary inflationary effects are gone, it remains a more or less persistent inflation problem. The fight will be accompanied by the usual pain.

Read also | “Inflation will drop dramatically in the coming months.”

To assess how likely this scenario is, take a look at wage developments. The image below gives the impression that wage growth has passed its peak. However, at the moment, the price is still well above what is needed to maintain the inflation rate at the 2% target over time.

Source: AWVN and Atlanta Fed

Totally different from the 70’s

The fourth explanation is that the high inflation of the past few years is not comparable to, say, the inflation of the 1970s. Inflation was initially due to the triple oil price and accommodative fiscal policy. A few years later, the price of oil tripled again.

This time, inflation was initially caused by bottlenecks that led to an explosion in transportation costs and some commodity prices. They have normalized now. Central bankers were right that these developments were temporary. Now that it’s been reversed, it’s pushing inflation down just as hard.

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Subsequently, energy prices skyrocketed. After the war broke out in Ukraine, the price of oil rose to double the pre-pandemic level and the European gas price to more than 2,000% above that level. But the big difference with the 1970s is that energy prices have fallen again. Oil is now only slightly more expensive than it was in 2019. The European gas price is about 92% lower than it was in August last year, although the price is still twice as high as before the pandemic.

So far, inflation has been painlessly reduced. Whether that will continue is uncertain. What is certain is that the opportunity is greater than it was in the 1970s because the inflationary process is very different than it was then. Ultimate wage development is crucial.

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