Rising energy prices: what does this mean for prices and wages?

Since the start of the war in Iran, energy prices have been rising significantly. This raises the question of whether and to what extent this will ultimately lead to higher inflation. To understand how this works, we can look at the energy crisis of 2022, when energy prices – and gas prices in particular – rose much more sharply than is currently the case.

When energy prices rise, costs for many businesses increase immediately. This includes higher costs for transport and manufacturing. These businesses often respond relatively quickly by raising their selling prices. This does not necessarily mean that their profits immediately increase – that depends on the extent to which they can pass on their costs to their customers.

Wages tend to rise at a slower rate. Many employees are covered by a collective labour agreement, and wage agreements are revised once a year or even less frequently. Retail prices therefore initially tend to rise faster than wages.

Higher wages follow at a later stage

The figure below shows how businesses’ wage costs, their gross profit and the net balance of taxes and subsidies contribute to changes in the ‘GDP deflator’, an indicator of price trends for everything produced in the Netherlands. The annual change in the GDP deflator provides an indication of domestically generated inflation.

During the 2022 inflation surge, it was clear that prices were rising faster than wages. In the first phase, gross profits contributed more to domestic price trends than did wages. While energy costs rose sharply and businesses increased their prices almost immediately, it took some time before employees were able to secure higher wages through collective bargaining.

Over time, this is often followed by a phase in which wages do eventually adjust. Employees try to make up for the loss in purchasing power by negotiating higher wages. As a result, the contribution of wages to price trends increases, while the contribution of gross profits decreases. We also observed this shift in 2022 and beyond: initially, gross profits made a relatively large contribution to the GDP deflator, and subsequently this shifted to the contribution from wages.

Is such a shift happening again?

Not for the time being. Although energy prices have been rising again since February, recent GDP deflator figures for the first quarter of 2026 still show a slight fall. Consumer prices, too, have so far risen at a much slower rate than they did following the energy price shock in 2022. Furthermore, the contribution from gross profits and wages has remained virtually unchanged compared with the previous quarter. That is not surprising: experience from 2022 shows that these shifting effects often happen with a delay.

How does it end?

When wages rise, the costs for businesses also go up. If businesses pass on these costs in their prices, wage and price  movements can reinforce each other. Economists refer to this as a wage-price spiral. An earlier DNB analysis shows that the interaction between wages and prices is limited, however. Higher prices do lead to higher wages in the long run, but higher wages are passed on to prices to a much lesser extent. As a result, the effect is not amplified indefinitely, but gradually fades away.

For central banks, the key considerations are whether the effect of rising prices will spread to an increasing number of goods and services and whether longer-term inflation expectations will increase. As long as households and businesses remain confident that inflation will eventually return to the target level, the risk of persistently high inflation remains limited.