1. How historic is this inflation?
Historic, because it is a record. The Central Bureau of Statistics (CBS) has been keeping track of the so-called consumer price index (cpi) since 1963. Statistics Netherlands’ statisticians look at how the price of a selection of products and services develops and calculate an average from this. Every month, Statistics Netherlands determines how that average price level compares to the same month a year earlier – the inflation figure for August does not mean that prices are on average 12 percent higher than in July.
Inflation has often been high since 1963, but for comparable figures we have to go back to the mid-1970s and the oil crisis. In January 1975 inflation was 11.1 percent. That was the record so far. After September 1975, inflation has always remained below 10 percent, until July of this year. And a month later, Statistics Netherlands noted a further increase.
2. Last week the news was that inflation was 13.6 percent in August. So why is this a record?
Two inflation figures are published monthly. One figure, which is 13.6 percent from last week, is a European calculation. Today’s 12 percent concerns the calculation of Statistics Netherlands. The difference between the Dutch figure and the European figure mainly lies in the costs of owning a home. These costs are included in the Dutch inflation figures, but not in the European figures, because there is no agreement on how to measure those costs.
Statistics Netherlands looks at how much a homeowner would spend on a comparable rental home. But not all countries have an equally well-developed rental market, which makes such a comparison sometimes difficult to make. Due to the difference in measurement method, the Dutch inflation figures are therefore almost always lower than the European ones.
3. Who will this record inflation have the most impact on?
Energy prices cause the bulk of inflation. The price of energy was up 151 percent in August compared to a year earlier. Statistics Netherlands also looks at the price of new energy contracts. For people with a continuous energy contract, 44 percent of all users, inflation is lower. People with a gas-free home and, for example, solar panels are also less affected by the rising prices.
Yet inflation affects everyone. With an average increase of 13.1 percent, food is considerably more expensive than a year ago. This includes cereal products such as pasta. Due to the war in Ukraine, the price of grain on the international market has risen sharply. Both Russia and Ukraine are important grain exporters.
4. What measures has the government announced?
The coalition parties reached an agreement last week on tax relief. This concerns, for example, a 10 percent increase in the minimum wage, social assistance and AOW, an increase in the rent and health care allowance and a reduction in the first bracket of income tax. The final plans will be announced on Prinsjesdag.
Earlier this year, several measures were taken around energy prices, such as tax cuts and a surcharge for low incomes. This year, the cabinet says it cannot take any more measures to repair purchasing power,
5. Can’t companies just raise wages?
That’s what the unions want. For example, FNV tries to agree in collective bargaining agreements that wage increases will be linked to inflation. This has no longer been the case in the Netherlands since the 1980s. Few sectors are prepared to make such an agreement, because they fear a wage-price spiral: if wages rise, costs rise for a company, which in turn passes those costs on in a higher price, causing wages to rise again, and costs go up again. In the painting sector, for example, such automatic compensation is in the collective labor agreement, but the sector hopes to be able to adjust that agreement.
6. Wage increases, tax cuts, increases in benefits: all measures to compensate for inflation. But can we not let inflation fall?
One of the most important instruments for this is the European Central Bank (ECB). By raising the so-called deposit rate, the ECB can let the economy ‘cool down’. If interest rates go up, borrowing money becomes more expensive and the demand for products decreases. And if demand falls, prices fall.
The deposit rate is the interest rate at which commercial banks can place money with the ECB for a short period of time. That interest rate is reflected in the interest rates that commercial banks charge their customers. Until July, the deposit rate was negative. For the first time since 2011, the ECB interest rate rose to 0 percent.
A further rate hike will probably be decided this week, to 0.5 or even 0.75 percent. President Klaas Knot of De Nederlandsche Bank hopes that this will reduce inflation to 2 percent.
The rate hike is not without risk. Weaker EU economies like Italy with a lot of debt could get into trouble. Some economists also fear a recession: at least two quarters of economic contraction due to a decline in demand.