Dutch inflation jumps to 13.6%; To remain high for a while: DNB president

Daily life in the Netherlands was 13.6 percent more expensive in August than the same month last year, Statistics Netherlands (CBS) reported. Inflation in the Netherlands and the rest of the eurozone has been high for months, and that will be the case for a while yet, expects Klaas Knot, president of De Nederlandsche Bank (DNB).

At 13.6 percent, inflation was even higher than in July. Sharply rising gas and electricity prices are the main culprits. But those higher energy costs are also increasingly affecting food prices. According to CBS, food, drink, and tobacco were almost 11 percent more expensive in August than in the same month last year.

CBS calculated this inflation figure on the harmonized European method. It is always higher than when using CBS’s own method. That figure won’t be released until next week. In July, inflation was 11.6 percent, according to the European method.

Inflation in the eurozone will remain high, the DNB president said. The high price increases aren’t only the result of shocks like high energy prices and shortages of materials and products like computer chips, but also of high demand for products and services. That is evident from the better-than-expected growth figures of the European economies, Knot said in a speech he gave in Denmark on Tuesday.

Growth may still turn out favorable for the current quarter, for example, as a result of tourism in the summer period. Longer-term predictions are more difficult to make, but Knot sees signs that a slowdown is coming. For example, business activity in companies is declining, and households and businesses have less confidence in the economy. “But even if this slowdown does come, it alone won’t be enough to get inflation toward our medium-term target.”

At the same time, Knot also sees several risks that could cause inflation to increase further. For example, energy and food can remain expensive for longer because the war in Ukraine shows no signs of ending soon. Higher wages can also increase inflation because companies pass the wage costs on in their prices. A declining euro against the dollar can make certain things like oil and metals considerably more expensive because they are traded in dollars.

Because of all these issues, Knot, who is known as a hawk within the European Central Bank (ECB), advocates firm intervention in interest rate policy. “There is no time to tinker with interest rates carefully. We need to tackle the still-growing problem of persistently high inflation.”

The ECB raised interest rates by 0.5 percent at its last policy meeting. Another increase of 0.5 or perhaps even 0.75 is expected next week. Knot suggests continuing to raise interest rates until medium-term inflation expectations reach 2 percent, the target level set by the central bank. That may require rising interest rates above the “neutral level.” At that interest rate, which most economists set at between 1 and 2 percent, the economy is neither stimulated nor hindered.