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There is a good chance that inflation has already peaked and will soon fall again. The big price increase started in October last year, so the annual inflation rate is likely to be lower after October. That's what Han de Jong, former chief economist of ABN Amro, says in an interview with Holland Gold. He expects that the dreaded scenario of stagflation will not last long, as unemployment will rise and spending will fall. As a result, there is less demand for goods and services, which will automatically reduce inflationary pressures.
According to de Jong, signs of easing price pressure are already visible. He cites, as an example, the Container shipping rates. During the coronavirus pandemic, average rates rose from $1,500 to $11,000 due to increasing demand and logistical disruptions, but now they have fallen back to $6,000. He also points out that the growth of the money supply is now levelling off again after an acceleration during the corona pandemic. "In the pandemic, money growth has been massively accelerated by central bank policies, which have created monetary fuel for the inflation process. Now that is decreasing, so I also have the hope that the inflation process will come under pressure from that side."
In the conversation with Paul Buitink and Joris Beemsterboer, de Jong expresses his concerns about the state of affairs within the ECB. He refers to a study that showed that economists working at central banks are, on average, much more positive about their policies than economists in academia. It also showed that economists who defended monetary policy the most quickly made their careers within the central bank. This suggests that monetary policy is subject to Group Think And that there may not be enough room for critical voices.
De Jong understands that the ECB wants to keep interest rate differentials between different euro countries under control, but believes that the central bank should have set conditions for this. This was the case with the old OMT support program from 2012, but not in the new TPI program that the central bank announced this summer. So there is no big stick for countries like Italy and Spain to put their budgets in order. With the new bond-buying program, the central bank also suggests that it knows what the right interest rate for countries should be. According to de Jong, the central bank can never know for sure.
According to the economist, the ECB is lagging behind. During the corona crisis, interest rates were too low and should have been raised when the economy recovered. The central bank wanted to keep interest rates low in order to get to the 2% inflation target faster, but the consequence is that inflation is now far too high. At the time, the central bank was difficult about a few tenths of a percent, but now that inflation is many percentage points above that, the central bank is sticking to its position that this is all temporary.
This laconic attitude to inflation makes the ECB less credible, according to de Jong. What also doesn't help is that the central bank is now increasingly concerned with other issues such as diversity, inclusivity, sustainability and climate. "Important topics, but not the core task of the ECB."
