Broad compensation won't help purchasing power: DNB

Generous compensation from the government for the loss of purchasing power caused by rising prices. It’s tempting. But don’t do it, said Olaf Sleijpen, director of monetary affairs and financial stability at De Nederlandsche Bank (DNB). It can backfire, he wrote in an opinion piece in NRC. “After all, the government cannot take away the pain with support, only redistribute it.”

Increased energy prices, in particular, significantly impact many households’ purchasing power, said Sleijpen. So he understands the call to compensate families and companies for the higher inflation. However, there is a risk that this could increase inflation further.

“The cause of high inflation lies in the first place on the supply side of the economy,” Sleijpen wrote in NRC. “Supply shortages cannot be solved by providing financial support to buyers of products and services. That only stimulates demand while supply lags behind. An economic lesson is that prices will then rise.”

According to the DNB director, the wish for ample compensation is also due to the experience with the coronavirus measures. “During the coronavirus crisis, we benefited from broad financial support - and therefore, a decisive role for the government. Now we’re not. No matter how difficult that message is, we cannot ignore it.”

Sleijpen argued that the government should focus further compensation on the hardest hit households. He also sees part of the solution in appropriate wage increases.