Today has brought a couple of matters into focus and the Netherlands is turning out tp be rather a test case in several ways. We can open with one perspective which is that it is part of the inner core of Euro area nations. If the Euro were to break up then there are around 6 nations which could easily move into a new Germanic block and it is one of them. So one would not ordinarily expect it to be a type of economic outlier as it now is. So let me bring you up to date with this morning’s news from Netherlands Statistics.
Consumer goods and services were 14.5 percent more expensive in September than in the same month a year earlier, CBS reports. In August inflation was 12.0 percent. The rise in inflation was mainly due to the price development of energy.
I know the title says 17.1% and I will come to that as it reflects how you measure inflation and one of my long-running themes. But if we stay with this sequence we can see that it would appear some are questioning even such a relatively high number.
An inflation of 14.5 percent in September 2022 means that the prices of consumer products are 14.5 percent higher than in September 2021. So the inflation of 14.5 percent in September is not on top of the inflation of 12.0 percent in August.
If we move onto the causes then I am sure pretty much all of you will have guessed what for these purposes is public enemy number one.
Energy prices (electricity, gas and district heating) increased further in September. This has an increasing effect on inflation. Energy was 200 percent more expensive in September than in the same month last year. In August, the year-on-year increase was 151 percent.
Another factor was the expiry of the government pandemic help scheme for education.
The price developments of education and clothing also had an increasing effect on inflation. For a study program in the academic year 2021-2022 at vavo, mbo, hbo or university, students received a 50 percent discount on tuition fees, course fees or tuition fees. This was a government measure in connection with the corona crisis. This discount will no longer be available in the 2022-2023 academic year. This made education more expensive.
Also there was quite a surge in clothing prices.
Clothing prices were 8.0 percent higher in September than one year previously. In August it was 3.3 percent.
I am no expert in the Dutch sales season but it looks like the sales were in August although even so that is a very sharp move.
Even in these times some prices do fall and whilst it may be hard to believe with inflation at 14.5% these factors were in play.
The price development of petrol, on the other hand, had a downward effect on inflation. Petrol was 6.7 percent more expensive in September than in the same month a year earlier, in August it was 12.9 percent. The price development of a stay in a holiday park also had a depressing effect on inflation. The annual price increase decreased from 5.7 percent in August to 1.0 percent in September.
When I was a boy I used to enjoy holidays in a caravan park with my grandparents and wonder if the holiday parks are a modern version of that?
If you can get by without any energy then inflation is in fact much too high.
In September, consumer goods and services excluding energy and motor fuels were 6.5 percent more expensive than in the same month last year. In August, the annual price increase was 6.0 percent .
The Euro area Measure
We can now look at inflation calculated the European way which is the same as the UK CPI ( we copied this around 20 years ago).
Inflation in the Netherlands according to the European harmonized consumer price index (HICP) was 17.1 percent in September, Statistics Netherlands reported. In August it was 13.7 percent.
So we have a 2.6% gap and when we ask the Talking Heads question “How did I get here” you will find that as so often it is about housing costs.
The main difference between the CPI and the HICP for the Netherlands is that, unlike the CPI, the HICP does not take into account the costs of living in one’s own home.
This is really awkward on two counts for the Euro area measure. You see it includes those who rent but not property owners.
The rent for households living in rented accommodation is included in both the CPI and the HICP.
The situation below is an incredibly large flaw to say the least when you consider how much of people’s expenditure is on housing.
The HICP does not include any costs for living in one’s own home.
I recall the chief economist of the ECB saying that people spend up to a third of their income on this which means it is a very big issue. It gets ignored because as the military say the best way to hide something is to put it in plain sight and this has been going on since 1996 in the case of the Netherlands.
In February the ECB wrote an economic bulletin on the subject.
However, it also acknowledged that the inclusion of costs related to owner-occupied housing (OOH) would better represent inflation relevant for households.
Because this covers a lot of people.
The share of owner-occupiers ranges from 50% to 90%, with rates around or above 70% in 16 out of the 19 euro area countries.
So they are wrong to ignore them and somehow or other those responsible for inflation measurement have done nothing about it for nearly 30 years.
There is an irony here in that the CPI measure does claim to include housing costs fully nit makes a hash of it.
An imputed rent is calculated in the CPI for households who live in an own home, and its development contributes to the CPI.
Not one person has even paid an imputed rent, with the clue being in the word imputed.
There are two really big issues here. The first is something I have been pressing for more than a decade which is that measuring housing costs accurately is really important. I understand that when inflation was low some might have thought, “so what?” but even then it mattered because mostly unmeasured housing inflation was hitting first-time buyers and those trading up. As we have seen house prices soar this has badly affected people as well as distorting official statistics.
The CPI measure is lower than the headline because of quite a qwerk. You see imputed rents were introduced as a way of reducing recorded inflation. You do not need to take my word for it as here is the ECB.
Rent price developments in the euro area demonstrate remarkably stable inflation rates, with an average of 1.6% over the longer-term (20 years), partly reflecting indexation to past inflation trends and stickiness of long-term rental contracts.
Okay so what have house prices done in the same period.
By contrast, changes in house prices tend to be more closely linked to business cycles and sometimes also financial market dynamics, with considerable variation around their longer-term average of 3.3%
So roughly double and there in a nutshell is both the reason for my argument that house prices should be in the inflation measure and also why I face so much official resistance.
So here is the reality. The Euro area measure excluded owner-occupied housing costs to help keep recorded inflation lower. The original Dutch method tried that via using fantasy housing costs ( assuming you pay rent even if you do not). Those were the 2 strategies. In any inflation surge the Dutch effort was always likely to win because rents remain low and stable.
Oh and in case you do not believe me that the main effort is to misrecord inflation. They are already onto energy costs.
The first preliminary calculations have now been carried out. This shows that with a new method the inflation figure would have been significantly lower in recent months than what Statistics Netherlands has now published.
Of course they do….