Dutch central bank blames pay raises for continued high inflation last year

Wage increases were the biggest driver of inflation in the past year, according to De Nederlandsche Bank (DNB). Corporate profits have also contributed to inflation, although their contribution declined as the year progressed, the central bank said on Tuesday.

“The contribution of labor costs to domestic inflation last year was 3.9 percentage points, while the contribution of companies' net profits was 1 percentage point,” DNB said. In 2022, that was 1.5 percent for wage cuts and 1.1 percent for companies’ net profit.

According to the DNB, it is not surprising that wage costs made the largest contribution to domestically created inflation last year. “Wages rose sharply in 2023 mainly due to high wage demands in the previous year and the tight labor market,” the central bank said.

Domestic inflation decreased significantly in the second half of 2023. According to DNB, that is clearly reflected in a declining contribution from companies’ net profit. “In other words, companies absorbed rising labor costs through lower profit margins.”

DNB chair Klaas Knot frequently raised concerns about the wage-price spiral last year. Over the course of the year, there were 52 organized labor strikes, the most since 1972, and hourly wages rose by 7.0 percent. That was the biggest increase recorded in 45 years, according to Statistics Netherlands.

At the same time, food prices alone jumped by 12.1 percent. The price of goods and services rose by 6.5 percent, but annual inflation measured by the consumer price index fell from 10.0 percent in 2022 to 3.8 percent in 2023. That’s because the price of energy is included in the annualized inflation figure, and energy prices dropped substantially during 2023.

FNV union leader Zakaria Boufangacha used the 3.8 percent inflation rate to say the idea that wages can drive up inflation is fictional. “I hope that we can now say goodbye to the myth of the wage-price spiral for good. The very moderate inflation of the past period shows that this is not true,” he wrote in a statement earlier this month.

“While people worried about whether they could still afford groceries, employers and right-wing economists came up with their wage-price spiral fables and the call to moderate wages while profits continued to rise. It’s a good thing we didn’t respond and demanded our fair share.” The union intends to continue to advocate for higher wages until employees can make ends meet.

DNB expects inflation to fall to an average of 2.9 percent this year and 2.2 percent next year. “This expected decline can be traced back, among other things, to the expected decline in wage growth,” the central bank said. It expects trade unions will make lower wage demands after recent high increases and now that inflation is much lower.

The central bank currently estimates the risk of a wage-price spiral as limited. “Nevertheless, it remains important to monitor wage developments as many new wage agreements depend on past inflation developments, and labor market tightness is pushing up wage growth, albeit moderately.”