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Extremely high inflation is slowly but surely starting to take its toll. Due to expensive groceries, high fuel prices and rising energy bills, consumers have less and less money left over. This is despite the fact that incomes are barely rising. Those who have saved will no longer benefit, because the negative real interest rate also means that savers lose purchasing power. And we now also see those effects reflected in the figures, because New figures Statistics Netherlands (CBS) shows that consumer confidence has fallen further.
Consumer confidence fell for the fifth month in a row in February, reaching its lowest level since May 2020. That was at the beginning of the corona pandemic, when many entrepreneurs struggled with lockdown measures and feared bankruptcy. Now, consumers in particular are feeling the consequences, because companies are passing on the higher costs directly in their products. And those costs have risen sharply over the past year, as the graph below shows.
Largest increase in consumer and producer prices in decades
The high inflation we are currently experiencing is mainly caused by higher prices for energy and raw materials. In the space of a year, the price of oil has risen by 45%, while gas has become about 50% more expensive. Many food products have also risen by tens of percent, with the price of coffee and oats as the biggest outlier. They are now almost twice as expensive on the global commodity market as they were a year ago.
Many commodities have risen spectacularly in price in a year (Source: Finviz)
Of course, these huge price increases translate to the prices of products we buy on a daily basis. For example, the price of a pack of coffee in the store has risen by 15 to 20 percent in a year, while tomatoes have become 25 to 30 percent more expensive. The price of a loaf of bread has risen by about 10 to 20 percent.
The price of coffee has risen sharply due to poor harvests in Brazil, where 35% of all coffee beans for the Dutch market come from. The increase in the price of tomatoes is due to the high price of gas, which means that more greenhouses are empty. In some cases, growers can even earn more by selling their gas contract than by using the gas themselves for tomato production.
As you can see, the prices of products in the supermarket are not rising as fast as those of raw materials. This is because raw material prices are only a part of the total cost price. There are also costs for labour, packaging, marketing, transport and the like, and these have risen less rapidly in the past year. Also, food producers often have long-term contracts with suppliers, which means that an increase in the market price does not have a direct effect on prices in the shops. So there is also some delay in the passing-on of prices.
Inflation is therefore mainly caused by increased energy prices and transport costs. For example, container shipping prices have risen by a factor of five to six during the coronavirus pandemic. These costs are expected to fall again in the long term, especially if consumers adjust their spending habits due to rising prices and an uncertain economic outlook.
According to Statistics Netherlands (CBS) Fell Consumers' willingness to buy reached its lowest level in more than eight years in February. Consumers were also more negative about their financial situation. Both for the next 12 months and the past twelve months. More consumers also experience that prices have risen sharply, making them less inclined to make large purchases. While that share was still 16% at the beginning of 2021, 66% of consumers now experience that prices have risen sharply.
A decrease in households' disposable income means that they have less money left over for consumption. In the long run, this could slow down inflation. If, at the same time, market interest rates continue to rise, House price rise stalls and speculation in commodities decreases, inflation could disappear like snow in the sun. The inflation problem will then resolve itself, with the danger that it will tip over into deflation.
This scenario of debt deflation is possible, for example, when the rise in house prices stops and turns into a fall in prices. The housing market acts as a kind of turbo on the Dutch economy. When house prices rise, home-owning households feel rich and spend money easily. Now that interest rates are low, many people are still quick to take out a mortgage to help finance a renovation. If house prices fall, this leverage works the other way. Debt deflation is therefore still hanging over the market and is getting closer and closer with a rise in interest rates. In that scenario, gold and cash are the safest havens.
This contribution comes from Geotrendlines
