Stubbornly high inflation still eroding purchasing power: Rabobank economist

For two years, trade unions have been working to close the gap between inflation and income with high wage increase demands. But inflation is still high, and that gap is widening again, Rabobank economist Hugo Erken told AD. Wages will have to rise by over 4 percent in the coming months to make up for the loss of purchasing power.

“Wages have risen less rapidly than inflation since February, and that affects purchasing power,” Erken said. “We made a big hit last year and at the beginning of this year with wage increases. But now inflation and wage growth are diverging again.”

The European Central Bank is aiming for inflation around 2 percent. Dutch inflation has been hovering around 3 percent since the start of this year - significantly below the peak of 14.5 percent at the height of the energy crisis sparked by Russia’s invasion of Ukraine in 2022, but still higher than ideal. Wage increases have been historically high in the past two years but now seem to be leveling off, according to Statistics Netherlands.

Rabobank calculated that the high wage increases in the past two years have not completely compensated for the purchasing power loss caused by high inflation. Wage increases were 3.1 percent behind inflation in March, and the bank expects that gap to increase to 4.2 percent by the end of this year.

Trade union CNV will demand wage increases between 4 and 10 percent this year. FNV wants a 5 percent increase plus automatic price compensation, where wages automatically rise with inflation. The unions say their big demands are mainly in sectors that have seen no or low wage increases in recent years, where the workers are still suffering purchasing power loss from inflation.

Employers worry that continually high wage increases will put businesses at risk. “There are already problems in many industries,” said Jannes van der Velde of the employers’ association AWVN. “The catering industry and retail, for example, are already having a hard time. By significantly increasing wages, those industries will only get further into trouble.” He pointed to high wage increases in recent years. “Of course, employees must share in the growth prosperity. But you can only distribute when there is success.”

President Klaas Knot of De Nederlandsche Bank has repeatedly warned that high wage increases will only result in higher inflation - people have more to spend, so prices increase. He said he understands the trade unions want to protect their members’ purchasing power, but it could result in a wage-price spiral.