Almost 12 percent. That is the inflation in March 2022 compared to a year earlier. The Central Bureau of Statistics (CBS) made this figure on Friday morning, 11.9 percent to be exactknown.
How high an inflation of 11.9 percent is, can best be understood by means of a comparison. At the average inflation rate of recent years (about 2 percent), prices double every 36 years. If current inflation were to continue, prices would double within 7 years. This has never happened in post-war history. Only in the middle of the oil crisis, in 1975, was a comparable high monthly figure of 11.1 percent measured.
State Secretary Marnix van Rij (Fiscality, CDA) spoke on Friday of an “exorbitant increase” in the inflation rate. He added that the cabinet will not be able to fully compensate for the resulting loss of purchasing power. The increase is simply too great for that. Just three weeks ago, the government announced a package of measures worth 2.8 billion euros to partly offset the effects of rising inflation. For example, the excise duty on fuels was reduced as of April 1, and the VAT on energy will also be temporarily reduced. The opposition immediately called for more such compensation measures on Friday.
Energy prices have doubled
Inflation in the Netherlands is much higher than in many other euro countries. In Germany it was 7.3 percent, the highest figure since German unification in 1990. In France inflation was 5.1 percent and Spain reported an inflation rate of 9.8 percent. For the entire eurozone, the currency depreciation amounted to 7.5 percent†
Although the Dutch inflation rate of 11.9 percent is the highest in the eurozone after Estonia and Lithuania, it is not the case that everyone now feels the full pain of that currency depreciation for their groceries. Statistics Netherlands’ total inflation figure is made up of several sub-figures. Categories such as food, services and industrial goods saw price increases of 5.5, 2.1 and 4.2 percent respectively in March. Also high, but not close to 11.9 percent.
The driver of this alarming inflation figure is energy prices. These showed an increase of 102.9 percent, or more than double the price compared to a year ago. The main reasons for this are the increased demand for energy – as the global economy is picking up steam after corona – and the panic about the supply of Russian oil and gas since the invasion of Ukraine. Without energy prices, inflation would be 3.6 percent.
Also read this opinion piece: Beware of tug-of-war over inflation in Europe
Not everyone has the same inflation
The good news is that not everyone immediately feels the pain of rising energy prices. Households that have long-term contracts with their energy supplier can ignore the price increases until the moment their contract expires. According to the Energy Monitor of market regulator ACM, last summer more than half of the eight million Dutch households had an energy contract that lasted longer than a year. The ABN Amro Economic Bureau therefore recently concluded that the current inflation figures show a distorted picture: in many households the actual loss of purchasing power is not too bad.
Hugo Erken, head of the Dutch economy at Rabobank, confirms this: “CBS mainly looks at what the conclusion of a new energy contract now costs compared to a year ago. That price has gone up enormously. But in practice, energy costs rose less rapidly for many people because of their permanent contract.”
That ‘good news’ is of no use to people who have a variable contract, or whose contract is expiring. They are already being confronted with the new, extremely high rates in one fell swoop. And the unfortunate thing is that people with lower incomes often opt for short-term contracts, because they are usually the most beneficial in the short term. As a result, the hardest blow of inflation often falls on the households that already have the least financial space to absorb such fluctuations. Energy companies therefore warned this week that they fear of an increasing number of households with payment arrears† The government has now announced targeted income support for the lowest incomes.
Also abroad, energy prices are the main driver of inflation. The fact that inflation there is in some cases considerably lower than in the Netherlands has to do with how the energy market works there and with the measures taken by governments. In France, for example, the Macron government has simply frozen gas prices to last October levels. Consumers therefore do not get the higher energy costs passed on, the government solves this through taxes.
Risk of wage-price spiral
It is uncertain how long inflation will remain at this extreme level. Historically, such periods have never lasted very long, and many economists now expect the peak to be reached with March’s 11.9 percent. “Although we also see indications that the price increase could last longer,” says Rabobank economist Erken. According to the bank’s models, inflation over the whole of 2022 may be around 7.7 percent.
The longer the period of high inflation lasts, the more pressure it puts on wage negotiations, says Erken. “Then you risk ending up in a wage-price spiral again, like in the eighties.” In addition, higher wages ensured that inflation persisted for a long time. Until now, the average collective labor agreement wage increase in 2022 at 2.7 percent is still on the low side, in any case insufficient to compensate for the loss of purchasing power.
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