A New Dutch Inflation Methodology: Definitely an Improvement

In 2022 the Netherlands had one of the highest rates of inflation in the Eurozone. In particular, energy price inflation in the Netherlands (with a peak of 200 percent in late 2022!) was significantly higher than the Eurozone average. Given that the European energy market is relatively well connected, this makes little sense. It turns out that it wasn't energy prices that were much higher and more volatile in the Netherlands, but rather how energy prices were measured (Figure 1).

Statistics Netherlands (CBS) assumed in its methodology that consumers sign a new contract every month (or statistically identical: have a variable rate). This works well enough when energy prices are relatively stable, but given that roughly half of Dutch consumers have a fixed price contract, this greatly overestimated energy inflation in 2022. Conversely, inflation is underestimated when prices are falling. According to this methodology, inflation in the Netherlands was 11.0 percent in 2022, compared to 9.1 percent in the Eurozone.

The CBS admitted that their methodology was inadequate to capture the current inflation dynamics and published their revised methodology on June 30th. The results (figure 2) show that the inflation dynamics for the Netherlands look wildly different under the various methodologies. Given that inflation was too high and then too low (so correct on average!), the CBS will not revise any previously reported figures because the old methodology was "not evidently incorrect" (link in Dutch).

Whilst the effect of the new methodology is large for the Netherlands (3.2% lower in 2022 as compared to the old methodology), the effect on the Eurozone inflation is rather limited. Dutch consumption accounts for roughly 6% of Eurozone consumption, which implies that the 3.2% overshoot in inflation in 2022 only lifted Eurozone inflation by 0.2%.

However, the higher-than-expected Dutch inflation may have had unintended consequences. The Dutch government may have over-aided the Dutch people in order to compensate for the loss of purchasing power, and labor unions may have set their wage demands too high. As a result, this might have pushed up core inflation even further.

HICP inflation fell from 6.8 percent to 6.4 percent in June. A relatively minor drop, but keep in mind that we are comparing inflation under the old methodology (May) to inflation under the new methodology (June). This effect will fade out over the next eleven months.

Going forward, core inflation is likely to be the primary driver of inflation. We expect that core inflation will ease back gradually from 7.1 percent in 2023 to 3.9 percent in 2024. The main reason for this is that the Dutch labor market remains extremely tight, and we expect it to remain so for the foreseeable future. As a result, we anticipate wage increases of 5.7 percent in 2023 and 5.6 percent in 2024. This means that real wage growth will turn positive again going forward.

Food price inflation is also expected to slow down, albeit at a faster rate than core inflation. The main reason for the drop in food price inflation is that commodity prices have fallen significantly in recent months, though higher wage, rent, and interest costs are offsetting some of this effect.

We expect energy prices to rise slightly in the second half of the year, as Europe begins its drawdown season and its energy security will be put to the test once again. However, these effects are dwarfed by the massive base effects in energy prices. We anticipate that these base effects will be so strong that headline inflation will fall to zero later this year. We expect headline inflation to pick up again after the base effects fade.