Inflation expected to stabilize at 2%, with room for wage increases

Although inflation is currently very high, there is a good chance that it will stabilize at around 2 percent in the medium term. There is also room for wage increases without directly running the risk of a wage-price spiral, according to the Central Planning Office (CPB) in an analysis of inflation development.

Inflation has risen due to, among other things, the sharp rise in demand for goods and services after the coronavirus pandemic. This led to delivery problems, such as with computer chips. But other things also became more difficult to obtain due to lockdowns in countries like China and the war in Ukraine, among other things. Partly due to the sanctions against Russia, prices for gas and oil, and therefore electricity, also increased.

If prices stop rising this year, the average inflation rate in the Netherlands, according to the European harmonized method, will already be 8.7 percent, the CPB said. But next year, inflation will be much lower because the most significant energy price increases will already be reflected in the price. The CPB also sees opportunities for the problems in supply chains to become less severe.

Despite the high inflation, wages can rise in many cases without risking a wage-price spiral whereby companies continue to charge high wages in their prices, thus fueling new inflation. Because many companies raised their prices, the terms of trade - the ratio between the export price and the import price - only deteriorated by 0.5 percent last year. In addition, corporate profits have been rising for years, while especially households pay for the extra energy. A once-off wage wave can rectify this imbalance, according to the planning office.

To prevent a wage spiral, restraint must be shown at the collective labor agreement bargaining table. Automatic price compensation, in which wages always increase by at least inflation, could fuel a wage-price spiral.

In the medium term, between three and five years ahead, the CPB sees a good chance that inflation will stabilize at around 2 percent. This requires credible policy from the European Central Bank (ECB) in which households, companies, and financial markets have confidence. If companies and households think the economy will do less well in the coming years, inflation could also return to a stable level below 2 percent.