Dutch economic forecast warns inflation could spike amid Middle East conflict

The Netherlands Bureau for Economic Policy Analysis (CPB) warns that inflation may rise sharply this year because of the war in the Middle East. Oil and gas prices have jumped after the United States and Israel attacked Iran, and Iran retaliated. Based on market expectations from early March, inflation could end up 0.6 percentage points higher.

If so, inflation would be over a quarter higher than in the CPB’s standard projection, which does not yet factor in the Iran war. In that scenario, the CPB anticipates inflation easing toward 2.3 percent.

Both projections carry a high degree of uncertainty. It remains unclear how long the conflict in the Middle East will disrupt the transport of oil and LNG through the Strait of Hormuz or restrict energy output from the Gulf states.

In the baseline scenario, purchasing power, the amount of money Dutch households can actually spend, is set to grow this year by an average of 1.4 percent. But even if the conflict between the U.S., Israel, and Iran were to conclude quickly, that purchasing power growth is expected to stall next year. While wages will continue to rise, tax burdens are increasing as well. Many people will be pushed into higher tax brackets since the thresholds for these brackets rise only modestly with inflation, and the rates for income tax in the first and second brackets will also go up. Oil prices are also rising due to the conflict, which is leading to increased costs for petrol.

The CPB anticipates that the number of adults and children living in poverty will shrink again this year, following the trend of recent years. That decline is expected to halt next year. Should energy prices continue to rise because of the conflict in the Middle East, the risk of poverty will grow, particularly since gas and electricity are essential expenses that cannot be avoided. Mortgage interest rates are also likely to rise.

The Dutch economy is expected to continue growing steadily this year and next, according to the CPB. GDP is forecast to increase by 1.4 percent in 2026 and 1.1 percent in 2027, down from 1.9 percent growth last year. Unemployment is set to rise slightly, reaching 4.1 percent of the labor force in 2026 and 4.3 percent in 2027.

The CPB has also raised concerns about worsening public finances. The budget deficit is widening, as spending on climate initiatives, defense, and healthcare is not fully funded. Over the long term, the Netherlands could surpass the European threshold of 3 percent of GDP.