Rental contracts and wage negotiations: two things in which the inflation rate always plays an important role. But if the Central Bureau of Statistics (CBS) applies the new calculation method to last year’s inflation figures, they will be much lower. What are the consequences?
The biggest difference is in September. The 14.5 percent inflation that was reported at the time caused quite a stir, also in The Hague. The night before Prinsjesdag, partly due to the high inflation rate, consultations were held until the last minute and large purchasing power packages were negotiated. But with the new calculation method, inflation in that month would have been between 7.6 and 8.1 percent.
The graph below shows the inflation figures as reported last year and the new calculation. Statistics Netherlands uses a bandwidth for the latter:
Sandra Phlippen, chief economist at ABN Amro, has long criticized the calculation of the inflation rate. The day before Budget Day, the bank published a report in which the researchers looked at the influence of existing energy contracts. There was also a lower increase in monthly costs at that time.
“I am very happy with this new method, because it says much more about reality,” says Phlippen, “But I am concerned about the effect of those overestimated inflation figures. I don’t want to shortchange CBS, because calculating this is a huge job, but it is important that the effects are properly evaluated.”
So what are those possible effects? Phlippen: “The inflation figure that has been presented too high for months can lead to a further fueling of inflation. For example, it has had an impact on wage demands, on contractor contracts, and also on fears of even more inflation in the future.”
“The government also reacted to the high inflation rate when determining the amount of support,” says Phlippen. “All measures taken together caused the gross disposable income of most households in the eurozone to increase over the past year, and wages were not the largest part of this.”
Phlippen fears that this could lead to a so-called wage-price spiral. This is an economic phenomenon in which inflation reinforces itself: higher wages are demanded by that inflation, which means that companies have higher costs, which they pass on in their prices. “The tight labor market, the few bankruptcies and persistent inflation provide all the ingredients to set the fire for a wage-price spiral,” says Phlippen.
Statistics Netherlands says that the measurement method does not make much difference. “If you’re worried about last year’s high inflation and the wage-price spiral, you should also be worried about the under-measured inflation now,” says chief economist Peter Hein van Mulligen. “Measured over a long period of time, it is equal and therefore has no effect.”
He thinks that the effect can occur if only one month is taken into account when calculating inflation. “But if you consistently use the same month every year, you’ll eventually end up on the same level.”
The trade union FNV had put a high wage demand of 14.3 percent on the table, but many collective labor agreements failed to do so. ABN has calculated that the average collective labor agreement increases will be around 6 percent. A lot higher than in previous years, but lower than the new inflation rate.
“But wages are only one part of what can lead to a wage-price spiral,” says Phlippen, “The support measures come on top of that.”
That is why she thinks it is important that generic support is phased out. According to her, there has been enough time to know where the vulnerable households are located. “These are mainly low incomes in draughty rental homes. We must support them specifically.”
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