Inflation and counter-inflationary policy measures: The case of the Netherlands

Suyker, Wim Research Report Inflation and counter-inflationary policy measures: The case of the Netherlands IMK Study, No. 83-1 Provided in Cooperation with: Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation Suggested Citation: Suyker, Wim (2022) : Inflation and counter-inflationary policy measures: The case of the Netherlands, IMK Study, No. 83-1, Hans-Böckler-Stiftung, Institut für Makroökonomie und Konjunkturforschung (IMK), Düsseldorf, https://nbn-resolving.de/urn:nbn:de:101:1-2023011910301684045795 This Version is available at: https://hdl.handle.net/10419/270343 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ STUDY No. 83-1 • November 2022 • Hans-Böckler-Stiftung INFLATION AND COUNTER -INFLATIONARY POLICY MEASURES: THE CASE OF THE NETHERLANDS Wim Suyker 1 ABSTRACT Dutch inflation has risen steeply recently, despite unprecedented cuts in energy taxes and VAT, to a record high of 17% in September 2022. Energy has been by far the major driver of the inflation surge, but inflation has been broadening in 2022, with food price rises above 10% since July and core inflation at 6.0% in September. There is a sizeable difference between income groups regarding the impact of inflation. In September, Dutch inflation exceeded that of the euro area by 7%-point. This is however for a considerable part due to differences in the way gas and electricity prices are measured. The year-on-year increase of negotiated wages was up to 3.6% in September 2022. However, with the pick-up of nominal wages substantially lagging that of consumer prices, real wages are dropping at a record speed. The corporate mark-up is relatively stable. Government has taken substantial measures to cushion households and companies from the effects of high inflation, with budgetary costs of 1.0% of GDP in 2022 and 3.4% in 2023. In 2022, the main measures were cuts in energy taxes, but an energy allowance of 1300 euros for low income groups was also introduced. In 2023, by far the main measure will be an energy price cap. The government deficit may rise from 1.1% of GDP in 2022 to close to 4% of GDP in 2023. The cost of living crisis has not lead to formal talks about a social pact. This is in contrast with the economic crisis in the 1980s, which led to the Wassenaar Agreement. ————————— 1 Formerly CPB Netherlands Bureau for Economic Policy Analysis and Economics Department of the OECD. Seite 1 von 13 INFLATION AND COUNTER-INFLATIONARY POLICY MEASURES: THE CASE OF THE NETHERLANDS Wim Suyker1 Abstract Dutch inflation has risen steeply recently, despite unprecedented cuts in energy taxes and VAT, to a record high of 17% in September 2022. Energy has been by far the major driver of the inflation surge, but inflation has been broadening in 2022, with food price rises above 10% since July and core inflation at 6.0% in September. There is a sizeable difference between income groups regarding the impact of inflation. In September, Dutch inflation exceeded that of the euro area by 7%-point. This is however for a considerable part due to differences in the way gas and electricity prices are measured. The year-onyear increase of negotiated wages was up to 3.6% in September 2022. However, with the pick-up of nominal wages substantially lagging that of consumer prices, real wages are dropping at a record speed. The corporate mark-up is relatively stable. Government has taken substantial measures to cushion households and companies from the effects of high inflation, with budgetary costs of 1.0% of GDP in 2022 and 3.4% in 2023. In 2022, the main measures were cuts in energy taxes, but an energy allowance of 1300 euros for low income groups was also introduced. In 2023, by far the main measure will be an energy price cap. The government deficit may rise from 1.1% of GDP in 2022 to close to 4% of GDP in 2023. The cost of living crisis has not lead to formal talks about a social pact. This is in contrast with the economic crisis in the 1980s, which led to the Wassenaar Agreement. This study is part of a series produced jointly by Macroeconomic Policy Institute (IMK) and the Austrian Chamber of Labour Vienna (AK Wien). Editorial responsibility for this report: IMK. 1 Formerly CPB Netherlands Bureau for Economic Policy Analysis and Economics Department of the OECD. Seite 2 von 13 Recent price developments in the Netherlands Due to the covid recession, consumer price inflation fell from 2.8% in December 2019 to 0.3% in August 2020 (Figure 1). Inflation is measured by the year-on-year change in the harmonised consumer price index (HICP). Falling energy prices, down 10%, were the dominant component in the softening of overall inflation. The global recovery from mid-2020 onwards led to a rebound in energy and other commodity prices and thus to a swift pick-up in Dutch inflation. Pandemic-related supply chain disruptions contributed to this pick-up as well. Excess demand on good markets due to the shift from consumption of services to goods may also have played a role. Inflation started to exceed 2% in August 2021. The war in Ukraine has exacerbated the problem and in March 2022 inflation reached a double-digit rate. In September 2022, inflation reached 17.1%, a record high for the HICP-series starting in 1997. On basis of the national consumer price index, inflation was, at 14.5%, the highest in the post Second World War period. Those records are despite the unprecedented size of fiscal measures taken to moderate inflation pressures. In September, the temporary cut in energy taxes and VAT on energy dampened inflation by 2.6%-points. Figure 1: Inflation in the Netherlands, 2018-2022 Source: Eurostat On the real side of the economy, the covid recession was less severe than elsewhere in the euro area and the recovery was steeper. Real GDP was in the second quarter of 2020 in the Netherlands 9.2% lower than in the fourth quarter of 2019 before the pandemic, a comparable drop with Germany (-10.8%) but smaller than the average drop in the euro area (-14.8%). Slightly bigger support measures, somewhat less covid-related restrictions and a beneficial sectoral composition (less tourism and manufacturing) played a role in this somewhat smaller drop in GDP (CPB, 2021). The rebound was steeper than elsewhere. In the second quarter of 2022, real GDP was up 5.6% from the level in the fourth quarter of 2019, compared with no rise in Germany and a rise of 1.8% in the euro area. Pandemic-related supply chain disruption played a smaller role than elsewhere as the economy is more service oriented and the car industry is much smaller -2 0 2 4 6 8 10 12 14 16 18 20 jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep 2018 2019 2020 2021 2022 Consumer prices (hicp) Netherlands Euro area % change from year earlier Seite 3 von 13 than for instance in Germany. Moreover, support measures were continued in the Netherlands up to early 2022. As a result, unemployment dropped to a record low (3.2% of the labour force in April 2022) and demand strengthened. Energy has been by far the major driver of the inflation surge. In September 2022, the direct contribution of energy price rises to the overall price rise was 10.4%-points. However, inflation has been broadening during 2022 and is seeping into core inflation. Food inflation surpassed 4% year-on-year in January 2022 and was in August at a record high of 10.8%, softening marginally to 10.5% in September. The steep rise in Dutch food prices reflects global food commodity prices and is partly driven by higher prices of energy and fertilisers. Core inflation surpassed 4% year-on-year in May and was in September at a record high of 6.5%. Prices of both goods and services were up, prompted by demand pressures in some sectors and the end to the rent freeze. In July 2021, rents of social housing had been frozen for a year as a support measure during the covid-crisis. As a result, total rent rises dropped from 2.9% year-on-year in July 2020 to 0.8% in July 2021. In July 2022, rent rises (with a weight of 9% in the HICP-index) were back to 3.0%. Figure 2: Inflation differentials in the Netherlands between income groups, September 2022 Footnote: Inflation excluding the impact of the temporary cut in tuition fees in September 2021 – August 2022 Source: Own calculation on the basis of data of Statistics Netherlands (CBS) Statistics Netherlands (CBS) does not publish inflation by income group. But using their 2020 household survey, inflation by income groups can be estimated on the basis of the detailed inflation numbers by expenditure class. The share of gas in total consumption is much higher for low-income groups. So, given exploding gas prices, it is no surprise that inflation for low-income groups exceeds that for high-income groups. Focus is preferably on the second and ninth decile, as the first and tenth decile may be distorted by peculiarities (such as high share of students in first decile). In September, inflation in the second income decile (second lowest) was 1.1%-points above average, while that of the nineth income decile (second highest) was 0,9%-points below (See Figure 2). Such a difference is relevant as low-income groups have much fewer liquid assets to cushion the effects of an unexpected fall in real income. Liquid buffers are less than 4 months’ -3 -2 -1 0 1 2 3 12345678910 Lowest Highest Income decile Rentals (actual and imputed) Electricity Gas Fuels Other Total (fn) %-points difference from average year-on-year inflation Seite 4 von 13 income for 61% of households in the second income decile, compared to 19% of households in the ninth income decile. (AFM, 2020). Table 1: Key data on inflation and wage increases in the Netherlands Netherlands Euro area Annual inflation HICP All-items Sept. 17.1 9.9 Food, alcohol & tobacco Sept. 10.5 11.8 Energy Sept. 113.8 40.7 Core Sept. 6.5 4.8 Annual wage rise Negotiated Q2 2.9 2.4 Source: Statistics Netherlands (CBS), Eurostat and ECB Benchmarking Dutch inflation vis-à-vis the euro area average is currently problematic as the harmonised consumer price index (HICP) is not very harmonised with regard to gas and electricity prices (CBS, 2022a). Statistics Netherlands is using the price development of new energy contracts for its consumer price indices, while many households have fixed-term contracts and are therefore experiencing price rises with a delay (or not at all if price rises are very temporary). The approach of Statistics Netherlands leads currently to a substantial exaggeration of the inflation encountered by households. At the end of October, Statistics Netherlands published first preliminary consumer prices based on changes in existing energy contracts (CBS, 2022b). In August, the year-on-year price rise of gas was 34.0 - 96.5% instead of 170.5% as in the official price index based on new contracts. The price rise for electricity was 24.4 - 92.8% instead of 149.6%. And the total consumer price rise was 7.5 - 9.6% instead of 12%, much closer to the euro area average of 9.1%. Some other euro area countries (for example Belgium) are also using prices of new contracts in their consumer price index, but in other countries the basis is price changes in the existing contract of households. The latter is more in the spirit of the Eurostat manual on the harmonised consumer price index (Eurostat, 2018). The Dutch central bank has stressed that the difference in inflation between the Netherlands and the euro area was affected by diverging methods used to measure energy inflation (DNB, 2022). In September, Dutch inflation exceeded the euro area average by 7.2%-points (Table 1 and Figure 1). This statistical problem hampers assessing the role other factors are playing. There is not yet a price cap for gas and electricity in the Netherlands, unlike for instance in France. Another relevant factor is relatively high gas consumption by Dutch households. The share of gas in the current consumption basket is 4% in the Netherlands vis-à-vis 2% on average in the euro area. This makes a difference for overall inflation when gas prices are up 229%, as they were in September in the Netherlands. There is no difference in the use of fuels for personal transport equipment; their share in the Netherlands and in the euro area is 4%. As there are no major statistical problems, benchmarking can be done for food price inflation and core inflation. In September, core inflation was slightly higher than on average in the euro area while food price changes were slightly lower (Table 1). The differences were however not stable in recent months. Seite 5 von 13 An alternative measure to benchmark the Dutch inflation performance is the deflator of private consumption. While on the basis of the harmonised consumer price index Dutch inflation was 2.4%-points above the euro area average in the second quarter of 2022, it was 0.6%-points lower on the basis of the private consumption deflator. These are challenging times to forecast inflation. All forecasters had to make this year record upward revisions in their inflation forecasts. Uncertainty remains huge on the Russian war in Ukraine, the future development of energy prices and whether or not the euro area will enter a recession, and, if so, how deep this recession will be. In September, CPB Netherlands Bureau for Economic Policy Analysis (CPB) projected a drop in inflation (measured by the harmonised consumer price index, annual averages) from 11,4% in 2022 to 2.5% in 2023 (CPB, 2022) (Table 2). This would make the inflation surge in 2021/22 highly transitory. The forecast is based on the technical assumptions of a drop in the crude oil price from 105 to 90 dollar per barrel and a drop in the gas price (TTF) from 137 to 131 euro per mWh. Negotiated wage increases in the private sector are projected to accelerate from 2.9% in 2022 to 3.7% in 2023 (Table 2). The CPB forecast does not include the energy price cap in 2023 and was finalised before the strong consumer price rise in August and September. On the basis of inflation numbers up to September and taking into account the energy price cap, Rabo research is projecting inflation of 4.0% in 2023. Table 2: Main features of country forecast: the Netherlands, 2022-2023 2021 2022 2023 Inflation (HICP) 2.8 11.4 2.5 Negotiated wages, private sector 2.2 2.9 3.7 Purchasing power, median all households 0.3 -6.8 3.9 People in poverty (level in %) 5.7 6.7 4.9 Children in poverty (level in %) 7.2 9.2 6.7 GDP-volume 4.9 4.6 1.5 Unemployment rate (% of the labour force) 4.2 3.4 3.9 General government budget balance (% GDP) -2.6 -1.1 -2.5 Source: CPB (September 2022 forecast; the projection was finalised before the announcement of the energy price cap in 2023 and the publication of the steep price rises in August and September) Recent wage developments in the Netherlands Wage increases are clearly up recently. The year-on-year increase of negotiated wages was 1.9% in December 2021 and was up to 3.6% in September 2022. Wages rises were strongest in the government sector (4.9%), with a rise of 7% for teachers. Negotiated wage increases are currently slightly higher than in euro area (in the second quarter 2.9% vis-à-vis 2.4%) while the unemployment rate is substantially lower (3.3% vis-à-vis Seite 6 von 13 6.1%). In the light of the very low unemployment rate, nominal wages are rising moderately up to now. The pick-up in negotiated wage rises substantially lag that of consumer prices. In real terms, on the basis of the national consumer price index (CPI), negotiated wages dropped 9.6% year-on-year in September. Real negotiated wages have been falling since August 2021. Figure 3: Negotiated wages in the Netherlands, 2011-2022 Source: Statistics Netherlands (CBS) Standard statistics on negotiated wages mentioned above are of a backward-looking nature, providing information on wage increases from a year ago. There is in the Netherlands also information on the wage increases in the coming twelve months based on new wage agreements reached in a month. This prospective wage rise has risen from 1.8% in January 2021 to 4.4% in September 2022. Recently, after rare strikes, a deal with even a steeper wage rise was reached for the national railways Nederlandse Spoorwegen. After those railway strikes, smooth negotiations have led to a steep rise in negotiated wages in the metal and electro industry (9% in one year and a halve) and a one-off wage supplement of 1000 euros on top of the negotiated wages for employees of public transport in Rotterdam. Compensation per hour worked is a broader wage indicator than negotiated wages as it also includes the impact of promotions (but also of shifts in the composition of the workforce). This indicator is currently still distorted by the “NOW” job retention scheme during the pandemic. In the second quarter of 2022, compensation per hour worked rose 3.1% year-on-year. There are many press reports on steep profit rises of big multinational firms in the Netherlands. There are, however, no signs of a substantial rise in the corporate mark-up in published national accounts data. The net operating surplus of companies was 34% of net domestic product at factor costs in the second quarter of 2022, up from the coviddip of 31% in the second quarter of 2020 but equal to the share in 2019 (Figure 4). In the past steep rises in import prices led to a drop in the corporate mark-up. One could see the absence of such a drop in the current situation as an indication of increased market power of firms due to tight product market conditions. 0 1 2 3 4 jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 % from a year earlier Negotiated wages per hour, including special payments Seite 7 von 13 Figure 4: Profit share in the Netherlands, 1995-2022 Footnote: Profit share is net operating surplus (including surplus self-employed) as a percentage of net gross domestic product at factor costs. Source: Own calculation based on data Statistics Netherlands (CBS) The absence of a rise in the corporate mark-up is confirmed by decomposition of the price rise of total expenditures (sum of consumption, investment and exports). Prices of total expenditure were up 12.6% in the second quarter from a year earlier. The net operating surplus of firms excluding self-employed had a negative contribution of 0.6%- point (Figure 5). The contribution of import prices was 10.3%-points. So, inflation is almost completely driven by imports. Second-round effects in the form of profit mark-ups and labour costs are not seen yet. Figure 5: Role of imports, wages and profits in current inflation in the Netherlands Source: Own calculation based on data Statistics Netherlands (CBS) 25 27 29 31 33 35 37 39 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 % -6 -3 0 3 6 9 12 15 III III IV III III IV III III IV III III IV III 2018 2019 2020 2021 22 Imports of goods and servicers Compensation of employees per hour worked Gross income self-employed per hour worked Net operating surplus per unit production Net indirect taxes Consumption of fixed capital Price final expenditure % Imprint Publisher Macroeconomic Policy Institute (IMK) of Hans-Böckler-Foundation, Georg-Glock-Str. 18, 40474 Düsseldorf, Germany, phone +49 211 7778-312, email [email protected] IMK Study is an irregular online publication series available at: https://www.imk-boeckler.de/de/imk-studies-15380.htm The views expressed in this paper do not necessarily reflect those of the IMK or the Hans-Böckler-Foundation. 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