Inflation, inflation, inflation, I’m holding my breath, are you? – Opinion Han de Jong


Opinion Han de Jong

Today 16:38

Inflation, inflation, inflation. US inflation is slightly lower, core inflation slightly higher and opinions are divided. Brazil is a shining example of how to curb inflation, and according to the IMF, central banks are better off raising interest rates too much than too little. I hold my heart, do you?

There is no topic in the economy and financial markets that is currently being discussed as much as inflation. We already knew that inflation in our country was 14.5% in September, according to Statistics Netherlands, and 10.0% in the euro area. This week, September inflation figures were added for, among other things, the United States and Brazil. The US figures are of great importance because of the influence they have on the financial markets. I find the Brazilian numbers interesting because that country has had much more experience with high inflation in recent decades than we have, and the central bank there has followed a completely different strategy than ours.

Still, US inflation eased slightly in September: 8.2% year-on-year from 8.3% in August. Core inflation, i.e. excluding food and energy, actually increased: from 6.3% in August to 6.6% in September. Compared to August, prices rose by 0.4% in September and core inflation stood at 0.6%. Opinions about these figures are quite divided. Higher core inflation is bad news and will certainly not dissuade the Federal Reserve from thinking that interest rates need to rise further. But I also see comments concluding that the numbers weren’t that bad and that inflation will come down in the near future.

Rents make up a relatively large part of the US inflation basket, almost a third. The increase in rents actually paid and in rents imputed to homeowners accelerated further in September. The good news from an inflation perspective is that house prices in the US are now falling, and rents in that country are following house prices, albeit with some lag. It is therefore only a matter of time before the rent also falls. This will put significant downward pressure on inflation. I came across a comment that calculated inflation excluding food and rents was only 0.1% in September. To that one can of course say: well, if you tinker with everything that becomes more expensive, you are not left with inflation. Still, there is something to it.

I have said before that inflation will fall over the next year and that it may fall faster than many now expect. I stand by that position. Energy prices will not continue to rise, global logistics disruptions are easing, international freight rates are currently falling rapidly, wage growth is lagging well behind inflation, and the coming recession will do the rest.

Twice as high as Brazil
In Brazil, inflation fell from 8.7% in August to 7.2% in September, after peaking at 12.1% in April this year. Unlike the ECB and the Fed, the central bank of Brazil started interest rate hikes as early as March 2021. Meanwhile, 12 interest rate steps have been taken and the official interest rate has been raised from 2% at the beginning of last year to 13.75% now. OUCH! But with some delay it succeeds in bringing inflation down. By the way, the financial pain caused by these rate hikes doesn’t seem to be that bad. The country has not (so far) entered a nasty recession.

My point is that the central bank in that country has succeeded in bringing inflation down. I know the situation varies from country to country, but our inflation is now more than double Brazil’s. I never thought I would ever experience that again. AWK, AWK!

Source: Refinitiv Datastream

During the various meetings of the IMF this week, inflation was also often in focus. The main message I got was the recommendation for central banks to continue to tighten monetary policy strongly until inflation is overcome. And the recommendation to the governments was not to get in the way of monetary policy and thus not allow an increase in the budget deficit. sic! That is where we are going with our measures supporting purchasing power and the energy price ceiling, which no one can say roughly how much it will cost, and for which coverage is not sought in advance. Then there is now also a temporary scheme for SMEs to partially compensate for the increased energy costs. It will also cost a few cents.

The problem for central banks is that monetary policy operates with significant and uncertain delays. If they continue to raise interest rates until inflation is close to their target, then they will certainly continue for too long and will actually make a recession unnecessarily deep. Unfortunately, we don’t know how much further interest rates will have to rise to bring inflation down. Therefore, it was interesting and particularly ominous that the IMF’s chief economist said that it is better to raise interest rates too much than too little. In his view, the long-term costs of high inflation exceed the short-term costs incurred by the central bank by actually causing unnecessary damage to the economy. I think you can build a tree over it. The extent to which the central bank raises interest rates more than necessary or less than necessary to control inflation need not be symmetrical. I think it’s better to do too little than too much.

By the way, I do not think that our interest rates should rise as sharply as in Brazil or as we did in the 1970s and early 1980s. First, I think there is a good chance that inflation will still fall over the course of next year. In addition, our economy is now much more interest rate sensitive than it was in the 1970s and 1980s.

Dutch industry is doing remarkably well
Production in Dutch industry was 5.9% higher in August than twelve months earlier. It is much better than in most countries around us. Mechanical engineering in particular continues to excel with a year-on-year production increase of 24.8%. You wonder how long our industry can continue to outperform overseas. And if you look more closely at the numbers, you can see that there has been a decrease from month to month in recent months. Since the peak in April, production has fallen by about 3%. It fits more into the picture elsewhere than the year-on-year figures.

Source: CBS

US better chance to avoid recession
Because the price of gas in Europe has risen so much and in the US much less, and also because the US is self-sufficient in energy and we are nowhere near that, the economic outlook between the two regions is very different. Americans have a much better chance of avoiding a recession, and if it comes, it will be less deep and shorter than ours. While our SMEs are under a lot of pressure due to high energy costs, even though there is now regulation to reduce energy costs, US SMEs have actually become less pessimistic in the last three months. As the last image shows, the National Federation of Independent Business (NFIB) confidence index improved from 91.8 in August to 92.1 in September.

Source: Refinitiv Datastream

As far as I’m concerned, this week was once again dominated by inflation. In the US it eased slightly in September, much better than ours, although core inflation rose and concerns remain high. Brazil is the shining example for me. There, the central bank raised interest rates early with the result that inflation has been falling for months now and is currently less than half of Dutch inflation, while the economic damage from monetary tightening has (so far?) been reduced better than expected.

The IMF has declared inflation public enemy number one, two, three and four. The fund recommends that the central banks continue strongly with interest rate increases and believes that it is better to raise the interest rate too much than too little. Sounds like a pretty blind panic to me and I’m holding my breath.

Han de Jong

Han de Jong is a former chief economist at ABN Amro and now resident economist at, among others, BNR Nieuwsradio. His comments can also be found at

Leave a Comment